ITEM 1A.RISK FACTORS
Please carefully consider the following discussion of material factors, events, and uncertainties that make an investment in our securities risky. When the factors, events and contingencies discussed below or elsewhere in this Annual Report materialize, our business, financial condition, results of operations, cash flows, reputation or prospects could be materially adversely affected. While we believe all known material risks are disclosed, additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also materially adversely affect our business, financial condition, results of operations, cash flows, reputation, prospects or stock price. Because of the risk factors discussed below and elsewhere in this Annual Report and in other filings we make with the SEC, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, historical trends should not be used to anticipate results or trends in future periods and actual results could differ materially from those projected in the forward-looking statements contained in this Annual Report.
Business and Operating Risks
Our business depends on our customers’ levels of capital investment and maintenance expenditures, which in turn are affected by numerous factors, including changes in the state of domestic and global economies, global energy demand and the liquidity cyclicality and condition of global credit and capital markets, which have impacted and which could continue to impact the ability or willingness of our customers to invest in our products and services and adversely affect our financial condition, results of operations and cash flow.
Demand for most of our products and services depends on the level of new capital investment and planned maintenance expenditures by our customers. The level of capital expenditures by our customers depends, in turn, on general economic conditions, availability of credit, economic conditions within their respective industries and expectations of future market behavior. Additionally, volatility in commodity prices can negatively affect the level of these activities and can result in postponement of capital spending decisions or the delay or cancellation of existing orders. The ability of our customers to finance capital investment and maintenance is also affected by factors independent of the conditions in their industry, such as the condition of global credit and capital markets.
The businesses of many of our customers, particularly oil and gas companies, chemical companies and general industrial companies, are to varying degrees cyclical and have experienced periodic downturns. Our customers in these industries, particularly those whose demand for our products and services is primarily profit-driven, tend to delay large capital projects, including expensive maintenance and upgrades, during economic downturns. For example, our chemical customers generally tend to reduce their spending on capital investments and operate their facilities at lower levels in a soft economic environment, which reduces demand for our products and services. Additionally, fluctuating energy demand forecasts and lingering uncertainty concerning commodity pricing, specifically the price of oil, have caused, and may in the future cause, our customers to be more conservative in their capital planning, reducing demand for our products and services. Reduced demand for our products and services could result in the delay or cancellation of existing orders or lead to excess manufacturing capacity, which unfavorably impacts our absorption of fixed manufacturing costs. This reduced demand has in the past and may continue in the future to also erode average selling prices in our industry. Any of these results could continue to adversely affect our business, financial condition, results of operations and cash flows.
The novel coronavirus ("COVID-19", "Pandemic") pandemic, and the volatile regional and global economic conditions stemming from the pandemic, have precipitated or aggravated many of the factors described above, and we expect that these factors will continue to adversely impact our operations and financial performance as well as those of many of our customers and suppliers. For further discussion of the risks presented by the ongoing pandemic, see the discussion below under the heading “The outbreak and global spread of the novel coronavirus (COVID-19) are having an adverse impact on our operations and financial performance, as well as on the operations and financial performance of many of our customers and suppliers. We are unable to predict the full extent to which the COVID-19 pandemic will continue to adversely impact our operations, financial performance, results of operations, financial condition, cash flows and/or stock price.”
Additionally, our customers sometimes delay capital investment and maintenance even during favorable conditions in their industries or markets. Despite these favorable conditions, the general health of global credit and capital markets and our customers' ability to access such markets impacts investments in large capital projects, including necessary maintenance and upgrades. In addition, the liquidity and financial position of our customers impacts capital investment
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decisions and their ability to pay in full and/or on a timely basis. Any of these factors, whether individually or in the aggregate, could have a material adverse effect on our customers and, in turn, our business, financial condition, results of operations and cash flows.
Volatility in commodity prices, effects from credit and capital market conditions and global economic growth forecasts have in the past prompted and may in the future prompt customers to delay or cancel existing orders, which could adversely affect the viability of our backlog and could impede our ability to realize revenues on our backlog.
Our backlog represents the value of uncompleted customer orders. While we cannot be certain that reported backlog will be indicative of future results, our ability to accurately value our backlog can be adversely affected by numerous factors, including the health of our customers' businesses and their access to capital, volatility in commodity prices (e.g., copper, nickel, stainless steel) and economic uncertainty. While we attempt to mitigate the financial consequences of order delays and cancellations through contractual provisions and other means, if we were to experience a significant increase in order delays or cancellations that can result from the aforementioned economic conditions or other factors beyond our control, it could impede or delay our ability to realize anticipated revenues on our backlog. Such a loss of anticipated revenues could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our inability to deliver our backlog on time could affect our revenues, future sales and profitability and our relationships with customers.
At December 31, 2020, our backlog was $1.9 billion. In 2021, our ability to meet customer delivery schedules for backlog is dependent on a number of factors including, but not limited to, sufficient manufacturing plant capacity, adequate supply channel access to the raw materials and other inventory required for production, an adequately trained and capable workforce, project engineering expertise for certain large projects and appropriate planning and scheduling of manufacturing resources. Our manufacturing plant operations, capacity and supply chain are subject to disruption as a result of equipment failure, severe weather conditions and other natural or manmade disasters, including power outages, fires, explosions, terrorism, cyber-based attacks, conflicts or unrest, epidemics or pandemics (including the ongoing global COVID-19 pandemic), labor disputes, acts of God, or other reasons. We may also encounter capacity limitations due to changes in demand despite our forecasting efforts. Many of the contracts we enter into with our customers require long manufacturing lead times and contain penalty clauses related to late delivery. Failure to deliver in accordance with contract terms and customer expectations could subject us to financial penalties, damage existing customer relationships, increase our costs, reduce our sales and have a material adverse effect on our business, financial condition, results of operations and cash flows.
Failure to successfully execute and realize the expected financial benefits from our transformation and strategic realignment and other cost-saving initiatives could adversely affect our business.
In the second quarter of 2018, we launched and committed resources to our Flowserve 2.0 Transformation, a program designed to transform our business model to drive operational excellence, reduce complexity, accelerate growth, improve organizational health and better leverage our existing global platform. Additionally, in the second quarter of 2020, we identified and initiated certain realignment activities resulting from our Flowserve 2.0 Transformation to right-size our organizational operations based on the current business environment, with the overall objective to reduce our workforce costs.
While we have experienced significant financial benefits from our Flowserve 2.0 Transformation, we may not realize the full benefits that we currently expect within the anticipated time frame or at all. Adverse effects from our execution of transformation and realignment activities could interfere with our realization of anticipated synergies, customer service improvements and cost savings from these strategic initiatives. Additionally, our ability to fully realize the benefits and implement the transformation and realignment programs is limited by the terms of our credit facilities and other contractual commitments. Moreover, because such expenses are difficult to predict and are necessarily inexact, we may incur substantial expenses in connection with the execution of our transformation and realignment plans in excess of what is currently anticipated. Further, transformation and realignment activities are a complex and time-consuming process that can place substantial demands on management, which could divert attention from other business priorities or disrupt our daily operations. Any of these failures could, in turn, materially adversely affect our business, financial condition, results of operations and cash flows, which could constrain our liquidity.
If these measures are not successful or sustainable, we may undertake additional realignment and cost reduction efforts, which could result in future charges. Moreover, our ability to achieve our other strategic goals and business plans
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may be adversely affected, and we could experience business disruptions with customers and elsewhere if our transformation and realignment efforts prove ineffective.
We sell our products in highly competitive markets, which results in pressure on our profit margins and limits our ability to maintain or increase the market share of our products.
The markets for our products and services are geographically diverse and highly competitive. We compete against large and well-established national and global companies, as well as regional and local companies, low-cost replicators of spare parts and in-house maintenance departments of our end-user customers. We compete based on price, technical expertise, timeliness of delivery, contractual terms, project management, proximity to service centers, previous installation history and reputation for quality and reliability. Competitive environments in slow-growth industries and for original equipment orders have been inherently more influenced by pricing and domestic and global economic conditions and current economic forecasts suggest that the competitive influence of pricing has broadened. Additionally, some of our customers have been attempting to reduce the number of vendors from which they purchase in order to reduce the size and diversity of their supply chain. To remain competitive, we must invest in manufacturing, technology, marketing, customer service and support and our distribution networks. No assurances can be made that we will have sufficient resources to continue to make the investment required to maintain or increase our market share or that our investments will be successful. In addition, negative publicity or other organized campaigns critical of us, through social media or otherwise, could negatively affect our reputation and competitive position. If we do not compete successfully, our business, financial condition, results of operations and cash flows could be materially adversely affected.
Failure to successfully develop and introduce new products could limit our ability to grow and maintain our competitive position and adversely affect our financial condition, results of operations and cash flow.
The success of new and improved products and services depends on their initial and continued acceptance by our customers. Our businesses are affected by varying degrees of technological change and corresponding shifts in customer demand, which result in unpredictable product transitions, shortened life cycles and increased importance of being first to market with new products and services. Difficulties or delays in the research, development, production and/or marketing of new products and services may negatively impact our operating results and prevent us from recouping or realizing a return on the investments required to continue to bring these products and services to market.
Our inability to obtain raw materials at favorable prices may adversely affect our operating margins and results of operations.
We purchase substantially all electric power and other raw materials we use in the manufacturing of our products from outside sources. The costs of these raw materials have been volatile historically and are influenced by factors that are outside our control. In recent years, the prices for energy, metal alloys, nickel and certain other of our raw materials have been volatile. While we strive to offset our increased costs through supply chain management, contractual provisions and our Continuous Improvement Process initiative, where gains are achieved in operational efficiencies, our operating margins and results of operations and cash flows may be adversely affected if we are unable to pass increases in the costs of our raw materials on to our customers or operational efficiencies are not achieved.
The outbreak and global spread of the novel coronavirus (COVID-19) are having an adverse impact on our operations and financial performance, as well as on the operations and financial performance of many of our customers and suppliers. We are unable to predict the full extent to which the COVID-19 pandemic will continue to adversely impact our operations, financial performance, results of operations, financial condition, cash flows and/or stock price.
The COVID-19 pandemic has curtailed the movement of people, goods and services worldwide, including in most of the regions in which we conduct our operations. As part of intensifying efforts to contain the spread of COVID-19, a number of local, state and national governments have imposed various restrictions on the conduct of business and travel, such as stay-at-home orders and quarantines, that have led to a significant number of business slowdowns and closures. The COVID-19 pandemic has resulted in, and is expected to continue to result in, a substantial curtailment of business activities (including the decrease in demand for a broad variety of goods and services), weakened economic conditions, supply chain disruptions, significant economic uncertainty and volatility in the financial and commodity markets, including the reduction in global demand for oil and gas combined with excessive supply due to disagreements between OPEC, both in the United States and abroad.
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The COVID-19 pandemic is adversely impacting, and is expected to continue to adversely impact, our operations and financial performance, and has had an adverse impact on the operations and financial performance of many of our customers and suppliers. These impacts have included, and may continue to include: adverse revenue and income effects; disruptions to our global operations; customer shutdowns; customer reductions in capital expenditures, particularly for large projects; disruptions and delays in our supply chain; employee impacts from illness, shelter-in-place orders and other community response measures; modifications to business practices, such as mandatory work-from-home policies, restrictions on travel (including, in some cases, restrictions on travel to customer facilities); increased operational expenses and underutilized manufacturing capacity; and increased sanitation and hygiene practices in our facilities; and temporary closures of our facilities or the facilities of our customers and suppliers.
Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our operations and financial performance remains uncertain and difficult to predict. Further, the ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not within our control, including, but not limited, to: governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic (including restrictions on travel and transport, workforce pressures and social distancing and shelter-in-place orders); the impact of the pandemic and actions taken in response on global and regional economies, travel and economic activity; general economic uncertainty in key global markets and financial market volatility; the effect of the pandemic on the credit-worthiness of our customers; national or global supply chain challenges or disruption; facility closures; commodity cost volatility (including the time it takes for oil prices and demand to stabilize after the pandemic subsides); global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides, as well as response to a potential reoccurrence.
Further, the COVID-19 pandemic, and the volatile regional and global economic conditions stemming from the pandemic, could also precipitate or aggravate the other risk factors that we identify herein, which could adversely affect our operations, financial condition, results of operations and/or stock price. Further, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider to present material risks to our operations.
Terrorist acts, conflicts, wars, natural or manmade disasters, epidemics or pandemics, acts of God and other such events around the world at times materially adversely affect our business, financial condition and results of operations and the market for our common stock.
As a global company with a large international footprint, we are subject to increased risk of damage or disruption to us, our employees, facilities, partners, suppliers, distributors, resellers or customers due to, among other things, terrorist acts, conflicts, wars, severe weather conditions and other natural or manmade disasters, including power outages, fires, explosions, cyber-based attacks, epidemics or pandemics (including the ongoing COVID-19 pandemic), labor disputes, and acts of God wherever located around the world. The potential for future such events, the national and international responses to such events or perceived threats to national security, and other actual or potential conflicts or wars, such as the Israeli-Hamas conflict and ongoing instability in Syria and Egypt, have created many economic and political uncertainties. In addition, as a global company with headquarters and significant operations located in the U.S., actions against or by the U.S. may impact our business or employees. Although it is impossible to predict the occurrences or consequences of any such events, they could result in a decrease in demand for our products, make it difficult or impossible to deliver products to our customers or to receive components from our suppliers, create delays and inefficiencies in our supply chain and pose risks to our employees, resulting in the need to impose travel restrictions, which at times adversely affect our business, financial condition, results of operations and cash flows.
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Our business may be adversely impacted by work stoppages and other labor matters.
As of December 31, 2020, we had approximately 16,000 employees, of which approximately 5,000 were located in the U.S. Approximately 5% of our U.S. employees are represented by unions. We also have unionized employees or employee work councils in Argentina, Australia, Austria, Brazil, Finland, France, Germany, India, Italy, Japan, Mexico, The Netherlands, South Africa, Spain, Sweden and the U.K. No individual unionized facility produces more than 10% of our revenues. Although we believe that our relations with our employees are generally satisfactory and we have not experienced any material strikes or work stoppages recently, no assurances can be made that we will not in the future experience these and other types of conflicts with labor unions, works councils, other groups representing employees or our employees generally, or that any future negotiations with our labor unions will not result in significant increases in our cost of labor. Our ability to successfully negotiate new and acceptable agreements when the existing agreements with employees covered by collective bargaining expire could result in business disruptions or increased costs.
Our ability to implement our business strategy and serve our customers is dependent upon the continuing ability to employ talented professionals and attract, train, develop and retain a skilled workforce. We are subject to the risk that we will not be able to effectively replace the knowledge and expertise of an aging workforce as workers retire. Without a properly skilled and experienced workforce, our costs, including productivity costs and costs to replace employees may increase, and this could negatively impact our earnings.
In addition, our policies prohibit harassment or discrimination in the workplace. Notwithstanding our conducting training and taking disciplinary action or other actions against or in response to alleged violations, we may encounter additional costs from claims made and/or legal proceedings brought against us, and we could suffer reputational harm.
Our growth strategy depends on our ability to continue to expand our market presence through acquisitions, and any future acquisitions may present unforeseen integration difficulties or costs which could materially affect our business.
Since 1997, we have expanded through a number of acquisitions, and we may pursue strategic acquisitions of businesses in the future. Our ability to implement this growth strategy will be limited by our ability to identify appropriate acquisition candidates, covenants in our credit agreement and other debt agreements and our financial resources, including available cash and borrowing capacity. Acquisitions may require additional debt financing, resulting in higher leverage and an increase in interest expense or may require equity financing, resulting in ownership dilution to existing shareholders. In addition, acquisitions sometimes require large one-time charges and can result in the incurrence of contingent liabilities, adverse tax consequences, substantial depreciation or deferred compensation charges, the amortization of identifiable purchased intangible assets or impairment of goodwill, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
When we acquire another business, the process of integrating acquired operations into our existing operations creates operating challenges and requires significant financial and managerial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the more common challenges associated with acquisitions that we may experience, and have experienced in the past, include:
•loss of key employees or customers of the acquired company;
•conforming the acquired company's standards, processes, procedures and controls, including accounting systems and controls, with our operations, which could cause deficiencies related to our internal control over financial reporting;
•coordinating operations that are increased in scope, geographic diversity and complexity;
•retooling and reprogramming of equipment;
•hiring additional management and other critical personnel; and
•the diversion of management's attention from our day-to-day operations.
Further, no guarantees can be made that we would realize the cost savings, synergies or revenue enhancements that we may anticipate from any acquisition, or that we will realize such benefits within the time frame that we expect. If we are not able to timely address the challenges associated with acquisitions and successfully integrate acquired businesses, or if our integrated product and service offerings fail to achieve market acceptance, our business could be adversely affected.
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A significant data breach or disruption to our information technology infrastructure could adversely affect our business operations.
Our information technology networks and related systems and devices and those technology systems under control of third parties with whom we do business are critical to the operation of our business and essential to our ability to successfully perform day-to-day operations. These information technology networks and related systems and devices are susceptible to damage, disruptions or shutdowns due to programming errors, defects or other vulnerabilities, power outages, hardware failures, computer viruses, cyber-attacks, malware attacks, ransomware attacks, theft, misconduct by employees or other insiders, misuse, human errors or other events. If any of the aforementioned breaches or disruptions occur and our business continuity plans do not effectively resolve the issues in a timely manner, our business, financial condition, results of operations, and liquidity could be materially adversely affected.
In addition, any of the aforementioned breaches or disruptions could expose us to a risk of loss, disclosure, misuse, corruption, or interruption of sensitive and critical data, information and functions, including our proprietary and confidential information and information related to our customers, suppliers and employees. It is also possible a security breach could result in theft of material trade secrets or other material intellectual property. While we devote substantial resources to maintaining adequate levels of cybersecurity, there can be no assurance that we will be able to prevent all of the rapidly evolving forms of increasingly sophisticated and frequent cyberattacks, or avoid or limit a material adverse impact on our systems after such incidents or attacks occur. The potential consequences of a material cybersecurity incident include reputational damage, loss of customers, litigation with third parties, regulatory actions and fines, theft of intellectual property, disruption of manufacturing plant operations and increased cybersecurity protection and remediation costs. If we are unable to prevent, anticipate, detect or adequately respond to security breaches, our operations could be disrupted and our business could be materially and adversely affected.
Developments in the applicable legal standards for the handling of personal data require changes to our business practices, penalties, increased cost of operations, or otherwise harm our business. To conduct our operations, we regularly move data across national borders and must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S. and elsewhere. For example, the E.U. recently adopted the General Data Protection Regulation (the “GDPR”). The GDPR imposes additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently enacted laws and regulations can be costly; any failure to comply with these regulatory standards could subject us to legal and reputational risks, including proceedings against the Company by governmental entities or others, fines and penalties, damage to our reputation and credibility and could have a negative impact on our business and results of operations.
Related to International Operations
Economic, political and other risks associated with international operations could adversely affect our business.
A substantial portion of our operations is conducted and located outside the U.S. We have manufacturing, sales or service facilities in more than 50 countries and sell to customers in over 90 countries, in addition to the U.S. Moreover, we primarily source certain of our manufacturing and engineering functions, raw materials and components from China, Eastern Europe, India and Latin America. Accordingly, our business and results of operations are subject to risks associated with doing business internationally, including:
•instability in a specific country's or region's political or economic conditions, particularly economic conditions in Europe and Latin America, and political conditions in Russia, the Middle East, Asia, North Africa, Latin America and other emerging markets;
•trade protection measures, such as tariff increases, and import and export licensing and control requirements;
•political, financial market or economic instability relating to Brexit;
•political, financial market or economic instability relating to epidemics or pandemics (including the ongoing COVID-19 pandemic);
•uncertainties related to any geopolitical, economic and regulatory effects or changes due to recent or upcoming domestic and international elections;
•the imposition of governmental economic sanctions on countries in which we do business, including Russia and Venezuela;
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•potentially negative consequences from changes in tax laws or tax examinations;
•difficulty in staffing and managing widespread operations;
•increased aging and slower collection of receivables, particularly in Latin America and other emerging markets;
•difficulty of enforcing agreements and collecting receivables through some foreign legal systems;
•differing and, in some cases, more stringent labor regulations;
•potentially negative consequences from fluctuations in foreign currency exchange rates;
•partial or total expropriation;
•differing protection of intellectual property;
•inability to repatriate income or capital; and
•difficulty in administering and enforcing corporate policies, which may be different than the customary business practices of local cultures.
For example, political unrest or work stoppages negatively impact the demand for our products from customers in affected countries and other customers, such as U.S. oil refineries, that are affected by the resulting disruption in the supply of crude oil. Similarly, military conflicts in Russia, the Middle East, Asia and North Africa could soften the level of capital investment and demand for our products and services. The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from the pandemic, have precipitated or aggravated many of the factors described above, and we expect that these factors will continue to adversely impact our operations and financial performance as well as those of many of our customers and suppliers. For further discussion of the risks presented by the ongoing COVID-19 pandemic, see the discussion above under the heading “The outbreak and global spread of the novel coronavirus (COVID-19) are having an adverse impact on our operations and financial performance, as well as on the operations and financial performance of many of our customers and suppliers. We are unable to predict the full extent to which the COVID-19 pandemic will continue to adversely impact our operations, financial performance, results of operations, financial condition, cash flows and/or stock price.”
In order to manage our day-to-day operations, we must overcome cultural and language barriers and assimilate different business practices. In addition, we are required to create compensation programs, employment policies and other administrative programs that comply with laws of multiple countries. We also must communicate and monitor standards and directives across our global network. In addition, emerging markets pose other uncertainties, including challenges to our ability to protect our intellectual property, pressure on the pricing of our products and increased risk of political instability, and may prefer local suppliers because of existing relationships, local restrictions or incentives. Our failure to successfully manage our geographically diverse operations could impair our ability to react quickly to changing business and market conditions and to enforce compliance with standards and procedures.
Our future success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Any of these factors could, however, materially adversely affect our international operations and, consequently, our financial condition, results of operations and cash flows.
Our operations may be impacted by the United Kingdom’s exit from the European Union.
The United Kingdom’s June 2016 referendum in which voters approved an exit from the European Union (commonly referred to as “Brexit”) and subsequent developments related to the referendum have caused and may continue to cause volatility in the global stock markets, currency exchange rate fluctuations and global economic uncertainty, which could adversely affect our customers’ ability to invest in capital expenditures, which may in turn reduce demand for our products and services. The United Kingdom’s membership in the European Union single market ended on December 31, 2020. On December 24, 2020, the United Kingdom and the European Union announced that they had struck a new bilateral trade and cooperation deal governing the future relationship between the United Kingdom and the European Union (the “EU-UK Trade and Cooperation Agreement”), which is expected to be formally ratified by the EU parliament during the first quarter of 2021. The EU-UK Trade and Cooperation Agreement provides some clarity in respect of the intended shape of the future relationship between the United Kingdom and the European Union and some detailed matters of trade and cooperation. However, there remain unavoidable uncertainties related to Brexit and the new relationship between the United Kingdom and the European Union.
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The United Kingdom’s withdrawal from the European Union may result in adverse effects on the tax, tax treaty, currency, operational, legal and regulatory regimes to which our businesses in the region are subject. Brexit could also, among other potential outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the European Union, significantly disrupt trade between the United Kingdom and the European Union and other parties, and result in greater restrictions on imports and exports between the United Kingdom and other European Union countries, among other regulatory complexities. These potential and unknown outcomes and uncertainties related to Brexit and its impact on the global economic climate could have a material adverse effect on our operations, financial condition, results of operations and cash flows.
Implementation of new tariffs and changes to or uncertainties related to tariffs and trade agreements could adversely affect our business.
The U.S. has recently implemented certain tariffs on steel and aluminum imported into the country. In response, certain foreign governments have implemented or reportedly considered implementing additional tariffs on U.S. goods. In addition, there have been recent changes to trade agreements, like the U.S. withdrawal from the Trans-Pacific Partnership and the replacement of the North American Free Trade Agreement with the United States-Mexico-Canada Agreement. Under the new U.S. Presidential administration, U.S. policy with respect to tariffs and international trade agreements may be rolled back or modified in other ways. Uncertainties with respect to tariffs, trade agreements, or any potential trade wars negatively impact the global economic markets and could affect our customers’ ability to invest in capital expenditures, which may in turn result in reduced demand for our products and services, and could have a material adverse effect on our financial condition, results of operations and cash flows. Changes in tariffs could also result in changes in supply and demand of our raw material needs, affect our manufacturing capabilities and lead to increased prices that we may not be able to effectively pass on to customers, each of which could materially adversely affect our operating margins, results of operations and cash flows.
Our international operations expose us to fluctuations in foreign currency exchange rates which could adversely affect our business.
A significant portion of our revenue and certain of our costs, assets and liabilities, are denominated in currencies other than the U.S. dollar. The primary currencies to which we have exposure are the Euro, British pound, Mexican peso, Brazilian real, Indian rupee, Japanese yen, Singapore dollar, Argentine peso, Canadian dollar, Australian dollar, Chinese yuan, Colombian peso, Chilean peso and South African rand. Certain of the foreign currencies to which we have exposure, such as the Venezuelan bolivar and Argentine peso, have undergone significant devaluation in the past, which reduce the value of our local monetary assets, reduce the U.S. dollar value of our local cash flow, generate local currency losses that may impact our ability to pay future dividends from our subsidiary to the parent company and potentially reduce the U.S. dollar value of future local net income. Although we enter into forward exchange contracts to economically hedge some of our risks associated with transactions denominated in certain foreign currencies, no assurances can be made that exchange rate fluctuations will not adversely affect our financial condition, results of operations and cash flows.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws and regulations.
The U.S. Foreign Corrupt Practices Act ("FCPA") and similar anti-bribery laws and regulations in other jurisdictions, such as the UK Bribery Act, generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business or securing an improper advantage. Because we operate in many parts of the world and sell to industries that have experienced corruption to some degree, our policies mandate compliance with applicable anti-bribery laws worldwide. Violation of the FCPA or other similar anti-bribery laws or regulations, whether due to our or others' actions or inadvertence, could subject us to civil and criminal penalties or other sanctions that could have a material adverse impact on our business, financial condition, results of operations and cash flows. In addition, actual or alleged violations could damage our reputation or ability to do business.
Regulatory and Legal Risks
Our operations are subject to a variety of complex and continually changing laws, regulations and policies, both internationally and domestically, which could adversely affect our business.
Due to the international scope of our operations, the system of laws, regulations and policies to which we are subject is complex and includes, without limitation, regulations issued by the U.S. Customs and Border Protection, the U.S.
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Department of Commerce's Bureau of Industry and Security, the U.S. Treasury Department's Office of Foreign Assets Control and various foreign governmental agencies, including applicable export controls, customs, currency exchange control and transfer pricing regulations, as applicable. No assurances can be made that we will continue to be found to be operating in compliance with, or be able to detect violations of, any such laws, regulations or policies. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted. Compliance with laws and any new laws or regulations may increase our operations costs or require significant capital expenditures. Any failure to comply with applicable laws, regulations or policies in the U.S. or in any other country in which we operate could result in substantial fines and penalties, which could adversely affect our business.
In particular, there is uncertainty related to the new U.S. Presidential administration’s plans for new or existing treaty and trade relationships with other countries, including with respect to the January 2017 U.S. withdrawal from the Trans-Pacific Partnership, which may affect restrictions or tariffs imposed on products we buy or sell. These factors, together with other key global events during 2020 (such as the global economic impact of the COVID-19 pandemic, continuing uncertainty arising from the Brexit transition, as well as ongoing terrorist activity), may adversely impact the ability or willingness of non-U.S. companies to transact business in the U.S.This uncertainty may also affect regulations and trade agreements affecting U.S. companies, global stock markets (including the NYSE, on which our common shares are traded), currency exchange rates, and general global economic conditions. All of these factors are outside of our control, but may nonetheless cause us to adjust our strategy in order to compete effectively in global markets. For further discussion of the impact of tariffs and trade agreements on our business, please see the discussion above under the heading "Implementation of new tariffs and changes to or uncertainties related to tariffs and trade agreements could adversely affect our business."
Environmental compliance costs and liabilities could adversely affect our financial condition, results of operations and cash flows.
Our operations and properties are subject to regulation under environmental laws, which can impose substantial sanctions for violations. We must conform our operations to applicable regulatory requirements and adapt to changes in such requirements in all countries in which we operate.
We use hazardous substances and generate hazardous wastes in many of our manufacturing and foundry operations. Most of our current and former properties are or have been used for industrial purposes, and some may require clean-up of historical contamination. We are currently conducting investigation and/or remediation activities at a number of locations where we have known environmental concerns. In addition, we have been identified as one of many PRPs at four Superfund sites. The projected cost of remediation at these sites, as well as our alleged "fair share" allocation, while not anticipated to be material, has been reserved. However, until all studies have been completed and the parties have either negotiated an amicable resolution or the matter has been judicially resolved, some degree of uncertainty remains.
We have incurred, and expect to continue to incur, operating and capital costs to comply with environmental requirements. In addition, new laws and regulations, stricter enforcement of existing requirements, the discovery of previously unknown contamination or the imposition of new clean-up requirements could require us to incur costs or become the basis for new or increased liabilities. Moreover, environmental and sustainability initiatives, practices, rules and regulations are under increasing scrutiny of both governmental and non-governmental bodies, which can cause rapid change in operational practices, standards and expectations and, in turn, increase our compliance costs. Any of these factors could have a material adverse effect on our financial condition, results of operations and cash flows.
We are exposed to certain regulatory and financial risks related to climate change, which could adversely affect our financial condition, results of operations and cash flows.
Emissions of carbon dioxide and other greenhouse gases and their role in climate change are receiving ever increasing attention worldwide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. Existing or future legislation and regulations related to greenhouse gas emissions and climate change by the U.S. Congress, state and foreign legislatures and federal, state, local and foreign governmental agencies could adversely affect our business. Additionally, it is uncertain whether, when and in what form mandatory carbon dioxide emissions reduction programs may be adopted. Similarly, certain countries have adopted the Paris Climate Agreement and these and other existing international initiatives or those under consideration affect our operations.
When our customers, particularly those involved in the oil and gas, power generation, petrochemical processing or petroleum refining industries, are subject to any of these or other similar proposed or newly enacted laws and regulations, we are exposed to risks that the additional costs by customers to comply with such laws and regulations could impact their
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ability or desire to continue to operate at similar levels in certain jurisdictions as historically seen or as currently anticipated, which could negatively impact their demand for our products and services. In addition, new laws and regulations that might favor the increased use of non-fossil fuels, including nuclear, wind, solar and bio-fuels or that are designed to increase energy efficiency, could dampen demand for oil and gas production or power generation resulting in lower spending by customers for our products and services. These actions could also increase costs associated with our operations, including costs for raw materials and transportation. There is also increased focus, including by governmental and non-governmental organizations, environmental advocacy groups, investors and other stakeholders on these and other sustainability matters, and adverse publicity in the global marketplace about the levels of greenhouse gas emissions by companies in the manufacturing and energy industry could reduce customer demand for our products and services or harm our reputation. Because it is uncertain what laws will be enacted, we cannot predict the potential impact of such laws on our future financial condition, results of operations and cash flows, but such new or additional laws could adversely affect our business.
We are party to asbestos-containing product litigation that could adversely affect our financial condition, results of operations and cash flows.
We are a defendant in a substantial number of lawsuits that seek to recover damages for personal injury allegedly resulting from exposure to asbestos-containing products formerly manufactured and/or distributed by us. Such products were used as internal components of process equipment, and we do not believe that there was any significant emission of asbestos-containing fibers during the use of this equipment. Although we are defending these allegations vigorously and believe that a high percentage of these lawsuits are covered by insurance or indemnities from other companies, there can be no assurance that we will prevail or that coverage or payments made by insurance or such other companies would be adequate. Unfavorable rulings, judgments or settlement terms could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Inability to protect our intellectual property could negatively affect our competitive position.
We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. We cannot guarantee, however, that the steps we have taken to protect our intellectual property will be adequate to prevent infringement of our rights or misappropriation of our technology. For example, effective patent, trademark, copyright and trade secret protection are unavailable or limited in some of the foreign countries in which we operate. In addition, while we generally enter into confidentiality agreements with our employees and third parties to protect our intellectual property, such confidentiality agreements could be breached or otherwise may not provide meaningful protection for our trade secrets and know-how related to the design, manufacture or operation of our products. Resorting to litigation to protect our intellectual property rights is burdensome and costly, and we may not always prevail. Further, adequate remedies are not always available in the event of an unauthorized use or disclosure of our trade secrets and manufacturing expertise. Failure to successfully enforce our intellectual property rights could harm our competitive position, business, financial condition, results of operations and cash flows.
Increased costs as a result of product liability and warranty claims could adversely affect our financial condition, results of operations and cash flows.
From time to time, we are exposed to product liability and warranty claims when the use of one of our products results in, or is alleged to result in, bodily injury and/or property damage or our products actually or allegedly fail to perform as expected. Some of our products are designed to support the most critical, severe service applications in the markets that we serve and any failure of such products could result in significant product liability and warranty claims, as well as damage to our reputation in the marketplace. While we maintain insurance coverage with respect to certain product liability claims, we may not be able to obtain such insurance on acceptable terms in the future, and any such insurance may not provide adequate coverage against product liability claims. In addition, product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods of time, regardless of the ultimate outcome. An unsuccessful defense of a product liability claim could have an adverse effect on our business, financial condition, results of operations and cash flows. Even if we are successful in defending against a claim relating to our products, claims of this nature could cause our customers to lose confidence in our products and our company. Warranty claims are not generally covered by insurance, and we may incur significant warranty costs that are not reimbursable, which could adversely affect our financial condition, results of operations and cash flows.
Financial and Accounting Risks
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Significant changes in pension fund investment performance or assumptions changes may have a material effect on the valuation of our obligations under our defined benefit pension plans, the funded status of these plans and our pension expense.
We maintain funded defined benefit pension plans that are either currently funded in accordance with local requirements in the U.S., Belgium, Canada, The Netherlands, Switzerland and the U.K., or above funded requirements in India and Mexico, and defined benefit plans that are not required to be funded and are not funded in Austria, France, Germany, Italy, Japan and Sweden. Our pension liability is materially affected by the discount rate used to measure our pension obligations and, in the case of the plans that are required to be funded, the level of plan assets available to fund those obligations and the expected long-term rate of return on plan assets. A change in the discount rate can result in a significant increase or decrease in the valuation of pension obligations, affecting the reported status of our pension plans and our pension expense. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in increases and decreases in the valuation of plan assets or in a change of the expected rate of return on plan assets. This impact may be particularly prevalent where we maintain significant concentrations of specified investments, such as the U.K. equity and fixed income securities in our non-U.S. defined benefit plans. Changes in the expected return on plan assets assumption can result in significant changes in our pension expense and future funding requirements.
We continually review our funding policy related to our U.S. pension plan in accordance with applicable laws and regulations. U.S. regulations have increased the minimum level of funding for U.S. pension plans in prior years, which has at times required significant contributions to our pension plans. Contributions to our pension plans reduce the availability of our cash flows to fund working capital, capital expenditures, R&D efforts and other general corporate purposes.
The recording of increased deferred tax asset valuation allowances in the future or the impact of tax law changes on such deferred tax assets could adversely affect our operating results.
We currently have significant net deferred tax assets resulting from tax credit carryforwards, net operating losses and other deductible temporary differences that are available to reduce taxable income in future periods. Based on our assessment of our deferred tax assets, we determined, based on projected future income and certain available tax planning strategies, that approximately $153 million of our deferred tax assets will more likely than not be realized in the future, and no valuation allowance is currently required for this portion of our deferred tax assets. Should we determine in the future that these assets will not be realized we will be required to record an additional valuation allowance in connection with these deferred tax assets and our operating results would be adversely affected in the period such determination is made. In addition, tax law changes could negatively impact our deferred tax assets.
Our outstanding indebtedness and the restrictive covenants in the agreements governing our indebtedness limit our operating and financial flexibility.
Under certain events of default, mandatory repayments on our outstanding indebtedness, which requires us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures, R&D efforts and other general corporate purposes, such as dividend payments and share repurchases, and could generally limit our flexibility in planning for, or reacting to, changes in our business and industry. In addition, we may need new or additional financing in the future to expand our business or refinance our existing indebtedness. Our current senior credit facility matures on July 16, 2024 and our senior notes are due in 2022, 2023 and 2030. For additional information regarding our current indebtedness refer to Note 13 to our consolidated financial statements included in Item 8 of this Annual Report. Our inability to timely access capital on satisfactory terms, including as a result of market disruptions, could limit our ability to expand our business as desired and refinance our indebtedness.
In addition, the agreements governing our indebtedness impose certain operating and financial restrictions on us and somewhat limit management's discretion in operating our businesses. These agreements limit or restrict our ability, among other things, to: incur additional debt; fully utilize the capacity under the senior credit facility; pay dividends and make other distributions; repurchase shares of our common stock in certain circumstances; prepay subordinated debt; make investments and other restricted payments; create liens; sell assets; and enter into transactions with affiliates.
We are also required to maintain debt ratings, comply with leverage and interest coverage financial covenants and deliver to our lenders audited annual and unaudited quarterly financial statements. Our ability to comply with these covenants may be affected by events beyond our control. Failure to comply with these covenants could result in an event of default which, if not cured or waived, may have a material adverse effect on our business, financial condition, results of operations and cash flows.
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Goodwill impairment could negatively impact our net income and shareholders' equity.
Goodwill is not amortized, but is tested for impairment at the reporting unit level, which is an operating segment or one level below an operating segment. Goodwill is required to be tested for impairment annually and between annual tests if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. Reductions in or impairment of the value of our goodwill or other intangible assets will result in charges against our earnings, which could have a material adverse effect on our reported results of operations and financial position in future periods.
There are numerous risks that may cause the fair value of a reporting unit to fall below its carrying amount, which could lead to the measurement and recognition of goodwill impairment. These risks include, but are not limited to, lowered expectations of future financial results, adverse changes in the business climate, increase in the discount rate, an adverse action or assessment by a regulator, the loss of key personnel, a more-likely-than-not expectation that all or a significant portion of a reporting unit may be disposed of, failure to realize anticipated synergies from acquisitions, a sustained decline in the Company’s market capitalization, and significant, prolonged negative variances between actual and expected financial results. In recent years, the estimated fair value of our Pump reporting unit has fluctuated, partially due to broad-based capital spending declines and heightened pricing pressures experienced in the oil and gas markets. Although we have concluded that there is no impairment on the goodwill associated with our Pump reporting unit as of December 31, 2020, we will continue to monitor their performance and related market conditions for future indicators of potential impairment. For additional information, see the discussion in Item 7 of this Annual Report and under Note 1 to our consolidated financial statements included in Item 8 of this Annual Report.
Ineffective internal controls could impact the accuracy and timely reporting of our business and financial results.
Our internal control over financial reporting has not always prevented or detected misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement, including material weaknesses in internal controls. We have devoted significant resources to remediate and improve our internal controls and to monitor the effectiveness of these remediated measures. There can be no assurance that these measures will ensure that we maintain at all times effective internal controls over our financial processes and reporting in the future. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. Failure to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or difficulties in their implementation, could harm our business and financial results and we could fail to meet our financial reporting obligations.
General Risks
We depend on key personnel, the loss of whom would harm our business.
Our future success will depend in part on the continued service of key executive officers and personnel. The loss of the services of any key individual could harm our business. Our future success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for officers and employees in our industry is intense and we may not be successful in attracting and retaining such personnel.
Changes in accounting principles and guidance could result in unfavorable accounting charges or effects.
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. A change in these principles can have a significant effect on our reported financial position and financial results. The adoption of new or revised accounting principles may require us to make changes to our systems, processes and internal controls, which could have a significant effect on our reported financial results and internal controls, cause unexpected financial reporting fluctuations, retroactively affect previously reported results or require us to make costly changes to our operational processes and accounting systems upon our following the adoption of these standards.
Forward-Looking Information is Subject to Risk and Uncertainty
This Annual Report and other written reports and oral statements we make from time-to-time include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. All statements other than statements of
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historical facts included in this Annual Report regarding our financial position, business strategy and expectations, plans and objectives of management for future operations, industry conditions, market conditions and indebtedness covenant compliance are forward-looking statements. Forward-looking statements may include, among others, statements about our goals and strategies, new product introductions, plans to cultivate new businesses, future economic conditions, revenue, pricing, gross profit margin and costs, capital spending, expected cost savings from our realignment programs, depreciation and amortization, research and development expenses, potential impairment of assets, tax rate and pending tax and legal proceedings. In some cases forward-looking statements can be identified by terms such as "may," "should," "expects," "could," "intends," "projects," "predicts," "plans," "anticipates," "estimates," "believes," "forecasts," "seeks" or other comparable terminology. These statements are not historical facts or guarantees of future performance, but instead are based on current expectations and are subject to material risks, uncertainties and other factors, many of which are outside of our control.
We have identified factors that could cause actual plans or results to differ materially from those included in any forward-looking statements. These factors include those described above under this "Risk Factors" heading, or as may be identified in our other SEC filings from time to time. These uncertainties are beyond our ability to control, and in many cases, it is not possible to foresee or identify all the factors that may affect our future performance or any forward-looking information, and new risk factors can emerge from time to time. Given these risks and uncertainties, undue reliance should not be placed on forward-looking statements as a prediction of actual results.
All forward-looking statements included in this Annual Report are based on information available to us on the date of this Annual Report and the risk that actual results will differ materially from expectations expressed in this report will increase with the passage of time. We undertake no obligation, and disclaim any duty, to publicly update or revise any forward-looking statement or disclose any facts, events or circumstances that occur after the date hereof that may affect the accuracy of any forward-looking statement, whether as a result of new information, future events, changes in our expectations or otherwise. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995 and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
ITEM 2.PROPERTIES
Our principal executive offices, including our global headquarters, are located at 5215 N. O'Connor Boulevard, Suite 2300, Irving, Texas 75039. Our global headquarters is a leased facility, which we began to occupy on January 1, 2004. In December 2018, we extended our original lease term an additional 10 years to December 2030. We have the option to renew the current lease for two additional five-year periods. We currently occupy approximately 151,000 square feet at this facility.
Our major manufacturing facilities (those with 50,000 or more square feet of manufacturing capacity) operating at December 31, 2020 are presented in the table below. See "Item 1. Business" in this Annual Report for further information with respect to all of our manufacturing and operational facilities, including QRCs.
Numberof Facilities ApproximateAggregateSquare Footage
FPD
FCD
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We own the majority of our manufacturing facilities, and those manufacturing facilities we do not own are leased. We also maintain a substantial network of U.S. and foreign service centers and sales offices, most of which are leased. The majority of our manufacturing leased facilities are covered by lease agreements with terms ranging from two to seven years, with individual lease terms generally varying based on the facilities’ primary usage. We believe we will be able to extend leases on our various facilities as necessary, as they expire.
We believe that our current facilities are adequate to meet the requirements of our present and foreseeable future operations. We continue to review our capacity requirements as part of our strategy to optimize our global manufacturing efficiency. See Note 5 to our consolidated financial statements included in Item 8 of this Annual Report for additional information regarding our lease obligations.
ITEM 3.LEGAL PROCEEDINGS
We are party to the legal proceedings that are described in Note 16 to our consolidated financial statements included in Item 8 of this Annual Report, and such disclosure is incorporated by reference into this Item 3. In addition to the foregoing, we and our subsidiaries are named defendants in certain other routine lawsuits incidental to our business and are involved from time to time as parties to governmental proceedings, all arising in the ordinary course of business. Although the outcome of lawsuits or other proceedings involving us, and our subsidiaries cannot be predicted with certainty, and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, management does not currently expect these matters, either individually or in the aggregate, to have a material effect on our financial position, results of operations or cash flows. We have established reserves covering exposures relating to contingencies to the extent believed to be reasonably estimable and probable based on past experience and available facts.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "FLS" and our CUSIP number is number is 34354P105. On February 11, 2021, our records showed 963 shareholders of record. We have historically paid quarterly dividends based on a dividend date-of-record in the last month of each quarter with the dividend paid the following month. Any subsequent dividends will be reviewed by our Board of Directors and declared in its discretion.
Issuer Purchases of Equity Securities
During the quarter ended December 31, 2020, we had no repurchases of our common stock shares as part of publicly announced plans. As of December 31, 2020, we have $113.6 million of remaining capacity under our current share repurchase program. The following table sets forth the repurchase data for each of the three months during the quarter ended December 31, 2020:
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(In millions)
_______________________________________
(1)Shares tendered by employees to satisfy minimum tax withholding amounts for Restricted Shares.
(2)Includes 12 shares that were tendered by employees to satisfy minimum tax withholding amounts for Restricted Shares at an average price per share of $30.02 and 1,904 shares purchased at a price of $33.53 per share by a rabbi trust that we established in connection with our director deferral plans, pursuant to which non-employee directors may elect to defer directors’ quarterly cash compensation to be paid at a later date in the form of common stock.
(3)On November 13, 2014, our Board of Directors approved a $500.0 million share repurchase authorization. Our share repurchase program does not have an expiration date, and we reserve the right to limit or terminate the repurchase program at any time without notice.
(4)Note 18 to our consolidated financial statements included in Item 8 of this Annual Report provides additional information regarding our share repurchase activity.
Stock Performance Graph
The following graph depicts the most recent five-year performance of our common stock with the S&P 500 Index and S&P 500 Industrial Machinery. The graph assumes an investment of $100 on December 31, 2015, and assumes the reinvestment of any dividends over the following five years. The stock price performance shown in the graph is not necessarily indicative of future price performance.
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Base Period December 31,
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ITEM 6.SELECTED FINANCIAL DATA
Year Ended December 31,
(Amounts in thousands, except per share data and ratios)
RESULTS OF OPERATIONS
FINANCIAL CONDITION
FINANCIAL RATIOS
Return on average net assets(g)(h)(1) 5.2% 9.2% 4.8% (0.3)% 4.9%
_______________________________
(a)Results of operations in 2020 include costs of $104.8 million resulting from realignment and transformation initiatives, resulting in a reduction of after tax net earnings of $86.9 million.
(b)Results of operations in 2019 include costs of $36.0 million resulting from realignment and transformation initiatives, resulting in a reduction of after tax net earnings of $21.7 million.
(c)Results of operations in 2018 include costs of $95.1 million resulting from realignment and transformation initiatives, resulting in a reduction of after tax net earnings of $72.4 million.
(d)Results of operations in 2017 include costs of $71.3 million resulting from realignment initiatives, resulting in a reduction of after tax net earnings of $54.3 million.
(e)Results of operations in 2016 include costs of $94.8 million resulting from realignment initiatives, resulting in a reduction of after tax net earnings of $75.8 million.
(f)Provision for income taxes in 2017 was impacted by the Tax Reform Act. See Note 19 to our consolidated financial statements included in Item 8 of this Annual Report.
(g)Total assets for 2019 impacted by our adoption of ASC 842, Leases (Topic 842) ("New Lease Standard") effective January 1, 2019.
(h)Calculated as adjusted net income divided by adjusted net assets, where (i) adjusted net income is the sum of earnings before income taxes, plus interest expense, multiplied by one minus our effective tax rate, and (ii) adjusted net assets is the average of beginning of year and end of year net assets, excluding cash and cash equivalents and debt due in one year.
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(i)Calculated as total debt minus cash and cash equivalents divided by the sum of total debt and shareholders' equity minus cash and cash equivalents.
(j)The financial information in the table above has been revised to reflect adjustments to previously reported amounts. The revision adjustments in 2019, 2018, 2017 and 2016 primarily related to the recognition of incurred but not reported claims associated with unasserted asbestos claims against the Company and the resulting impact on insurance recoveries. The impacts of the revision on the 2019 consolidated financial statements and 2018 consolidated statement of operations are described in Note 2 to the consolidated financial statements. Previously reported amounts for other periods were impacted as follows: net earnings attributable to Flowserve Corporation was reduced by $12.9 million and $5.0 million for the years ended December 31, 2017 and 2016, respectively, with a corresponding decreases in earnings (loss) per share, basic and diluted, of $0.10 and $.04, respectively. The net impact to 2018, 2017 and 2016 financial condition was a reduction of total equity of $28.8 million and $12.4 million as of December 31, 2018 and 2017, respectively, and an increase to total equity as of December 31, 2016 of less than $1 million. Specific line items impacted by the revisions are designated with a (1) in the above tables.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the accompanying consolidated financial statements and notes. See “Item 1A. Risk Factors” and the section titled “Forward-Looking Information is Subject to Risk and Uncertainty” included in this Annual Report on Form 10-K for the year ended December 31, 2020 ("Annual Report") for a discussion of the risks, uncertainties and assumptions associated with these statements. Unless otherwise noted, all amounts discussed herein are consolidated.
EXECUTIVE OVERVIEW
Our Company
We are a world-leading manufacturer and aftermarket service provider of comprehensive flow control systems. We develop and manufacture precision-engineered flow control equipment integral to the movement, control and protection of the flow of materials in our customers’ critical processes. Our product portfolio of pumps, valves, seals, automation and aftermarket services supports global infrastructure industries, including oil and gas, chemical, power generation and water management, as well as general industrial markets where our products and services add value. Through our manufacturing platform and global network of QRCs, we offer a broad array of aftermarket equipment services, such as installation, advanced diagnostics, repair and retrofitting. As of December 31, 2020, we have approximately 16,000 employees (“associates”) globally and a footprint of manufacturing facilities and Quick Response Centers in more than 50 countries.
Our business model is significantly influenced by the capital spending of global infrastructure industries for the placement of new products into service and maintenance spending for aftermarket services for existing operations. The worldwide installed base of our products is an important source of aftermarket revenue, where products are expected to ensure the maximum operating time of many key industrial processes. We have significantly invested in our aftermarket strategy to provide local support to drive customer investments in our offerings and use of our services to replace or repair installed products. The aftermarket portion of our business also helps provide business stability during various economic periods. The aftermarket business, which is primarily served by our network of 163 QRCs located around the globe, provides a variety of service offerings for our customers including spare parts, service solutions, product life cycle solutions and other value-added services. It is generally a higher margin business compared to our original equipment business and a key component of our profitable growth strategy.
Our operations are conducted through two business segments that are referenced throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"):
•Flowserve Pump Division ("FPD") for custom, highly-engineered pumps, pre-configured industrial pumps, pump systems, mechanical seals, auxiliary systems and replacement parts and related services; and
•Flow Control Division ("FCD") for engineered and industrial valves, control valves, actuators and controls and related services.
Our business segments share a focus on industrial flow control technology and have a high number of common customers. These segments also have complementary product offerings and technologies that are often combined in applications that provide us a net competitive advantage. Our segments also benefit from our global footprint, our
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economies of scale in reducing administrative and overhead costs to serve customers more cost effectively and shared leadership for operational support functions, such as research and development, marketing and supply chain.
The reputation of our product portfolio is built on more than 50 well-respected brand names such as Worthington, IDP, Valtek, Limitorque, Durco, Argus, Edward, Valbart and Durametallic, which we believe to be one of the most comprehensive in the industry. Our products and services are sold either directly or through designated channels to more than 10,000 companies, including some of the world’s leading engineering, procurement and construction ("EPC") firms, original equipment manufacturers, distributors and end users.
We continue to leverage our QRC network to be positioned as near to customers as possible for service and support in order to capture valuable aftermarket business. Along with ensuring that we have the local capability to sell, install and service our equipment in remote regions, we continuously improve our global operations. Despite recent headwinds caused by the COVID-19 pandemic, we continue to enhance our global supply chain capability to increase our ability to meet global customer demands and improve the quality and timely delivery of our products over the long-term. Additionally, we continue to devote resources to improving the supply chain processes across our business segments to find areas of synergy and cost reduction and to improve our supply chain management capability to meet global customer demands. We also remain focused on improving on-time delivery and quality, while managing warranty costs as a percentage of sales across our global operations, through the assistance of a focused Continuous Improvement Process ("CIP") initiative. The goal of the CIP initiative, which includes lean manufacturing, six sigma business management strategy and value engineering, is to maximize service fulfillment to customers through on-time delivery, reduced cycle time and quality at the highest internal productivity.
COVID-19 Update
The COVID-19 pandemic continues to have an impact on human health, the global economy and society at large. The pandemic is expected to continue to adversely impact, for its duration, our operations and financial performance. In response, we continue to actively monitor the impacts of the COVID-19 pandemic on all aspects of our business and geographies. Our cross-functional crisis management team established during the first quarter of 2020 has continued monitoring and making recommendations to management to help us continue operating as an essential business across jurisdictions, while also protecting the health and safety of our associates.
Despite our evolving response, the COVID-19 pandemic has had an adverse effect on our performance during the year, and we expect the impact will continue through at least the second quarter of 2021. While we cannot reasonably estimate with certainty the ongoing duration and severity of the COVID-19 pandemic, including the effects of any vaccine, or its ultimate impact on the global economy, our business or our financial condition and results, we nonetheless remain committed to providing the critical support, products and services that our customers rely on, and currently believe that we will emerge from these events well positioned for long-term growth.
Health and Safety of Our Associates
The health and safety of our associates, suppliers and customers around the world continues to be our first priority as we continue to navigate the COVID-19 pandemic, including recent spikes in cases and returning work-from-home restrictions in various geographies in which we operate. We are incredibly proud of the great teamwork exhibited by our global workforce who have demonstrated strong resilience in adapting to continually evolving health and safety guidelines while addressing these challenging times and providing products and services to our customers.
We have implemented policies and practices to help protect our workforce so they can safely and effectively carry out their vital work, and we have continued to revise those policies and practices in light of guidance received from local and regional health authorities where appropriate. We instituted global restrictions on non-essential travel in March 2020 and the work-from-home policy for all non-essential employees who are able to do so has continued in effect in locations where health officials have advised such policies, including for our global headquarters in Irving, Texas, which will maintain its work-from-home policy at least through the second quarter of 2021. In those locations where employees are going to work in our facilities, we have continued taking steps, in light of guidelines from local and global health experts to protect our employees so that we can continue to manufacture critical technologies and equipment, including providing face coverings and other personal protective equipment, enhanced cleaning of sites and implemented social distancing protocols.
Our employees and facilities have a key role in keeping essential infrastructure and industries operating, including oil and gas, water, chemical, power generation and other essential industries, such as food and beverage and healthcare. While some of our facilities have experienced periods of temporary closures during 2020 in accordance with decrees, orders and laws in their respective countries and geographies, as of February 18, 2021, all of our facilities are open and operational,
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and are running close to pre-COVID-19 levels as we continue to make essential products and provide services for our customers. However, the measures described above, combined with continued employee costs and under-absorption of manufacturing costs as a result of temporary closures and work-from-home policies, have had and are expected to continue having an adverse impact on our financial performance throughout the remainder of the pandemic.
Customer Demand
During 2020 and into 2021 the reduction in global demand for oil and gas driven by the COVID-19 pandemic, coupled with excessive supply due to disagreements between the Organization of Petroleum Exporting Countries (“OPEC”) and other oil producing nations in the first half of 2020, led to extreme volatility in global markets and in oil prices. These conditions have adversely impacted our customers, particularly in the oil and gas markets. For example, in the first half of 2020, these conditions drove a significant and broad-based decrease in customer planned capital spending, leading many of our large customers to announce double-digit capital expenditure budget decreases for the remainder of 2020. As a result, we saw overall bookings decline by approximately 20% during 2020 as compared to the same period in 2019, resulting in a lower sequential backlog, though we have not seen a significant increase in the levels of customer cancellations in our existing backlog.
Additionally, the rapidly evolving impacts of the COVID-19 pandemic during 2020 and into 2021 have caused reduced activity levels in our aftermarket business due to deferred spending of our customers' repair and maintenance budgets, including the impact of restricted access to our customers' facilities. While we expect that these repair and maintenance projects will ultimately need to be completed, the timing will largely depend on the duration of the COVID-19 pandemic and how the virus and any variants continue to spread in our customers' various geographies.
These trends are likely to continue during the duration of the COVID-19 pandemic as various actions implemented to combat the pandemic will continue to reduce demand for oil and gas. As a result, we have experienced decreased bookings, sales and financial performance and anticipate this continuing throughout the remainder of the pandemic. Additionally, we expect the headwinds in the oil and gas markets that have resulted in, and are likely to continue to result in, reduced capital expenditures and bookings for oil and gas customers to continue at least until oil demand and prices stabilize, which may not occur until after the pandemic subsides.
Supply Chain Impact
Since the onset of the pandemic, many of our suppliers have also experienced varying lengths of production and shipping conditions related to the COVID-19 pandemic, some of which continue to exist in highly affected countries. These conditions have had an adverse effect on the speed at which we can manufacture and ship our products to customers, and have also led to an increase in logistics, transportation and freight costs, requiring that we diversify our supply chain and, in some instances, source materials from new suppliers. Additionally, these conditions have in some cases impacted our ability to deliver products to customers on time, which has in turn led to an increase in backlog at some of our manufacturing sites. Though some of these issues have abated in the second half of 2020 and into 2021 certain disruptions in our supply chain and their effects have continued through the year, and we expect they will continue as the COVID-19 pandemic continues.
Operational Impacts
We have also engaged in a number of cost savings measures in order to help mitigate certain of the adverse effects of the COVID-19 pandemic on our financial results, including certain realignment activities (further described below under “RESULTS OF OPERATIONS"), a freeze on all non-essential open employment requisitions, cancellation of merit-based payroll increases for 2020, reduction of capital expenditures to approximately $60 million and cuts in other discretionary spending. Together, we planned for approximately $100 million of cost reductions, excluding realignment charges, in 2020 as compared to 2019, due in large part to our response to the effects of COVID-19, which partially offsets the increased costs and operational impacts of the safety protocols and procedures that we have implemented as described above under the heading "-Health and Safety of Our Associates." We continue to evaluate additional cost savings measures and will continue to implement such measures in the near term in order to reduce the impact of the COVID-19 pandemic on our financial results.
We continue to monitor and assess the spread of COVID-19, including in areas that have seen recent increases in cases, and we will continue to adapt our operations to respond the changing conditions as needed. As we continue to manage our business through this unprecedented time of uncertainty and market volatility, we will remain focused on the
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health and safety of our associates, suppliers, customers, and will continue to provide essential products and services to our customers.
Our Markets
Our products and services are used in several distinct industries: oil and gas, chemical, power generation, water management, and several other industries, such as mining, steel and paper, that are collectively referred to as "general industries."
Oil and Gas
The oil and gas industry, which represented approximately 34% and 41% of our bookings in 2020 and 2019, respectively, experienced a material decrease in capital spending in 2020 compared to the previous year. The decrease was primarily due to decreased project activity and short cycle investment resulting from the pandemic's negative impact on demand for refined products. Aftermarket opportunities in this industry also experienced a material decrease in 2020 due to deferred spending of our customers' repair and maintenance budgets and pandemic related challenges accessing our customers’ facilities.
The outlook for the oil and gas industry is heavily dependent on the duration of the pandemic and its impact on fuel demand, demand growth from both mature markets and developing geographies as well as changes in the regulatory environment. In the short-term, we believe that the pandemic will continue to negatively impact our customers’ capital investment and maintenance budgets. We further believe improved and stable oil prices provide support for increased demand for our aftermarket products and services. We believe the medium and long-term fundamentals for this industry remain attractive and see a stabilized environment with expected increased fuel demand on improved pandemic management, and as the industry works through current excess supply. In addition, we believe projected depletion rates of existing fields and forecasted long-term demand growth will require additional investments. With our long-standing reputation in providing successful solutions for upstream, mid-stream and downstream applications, along with the advancements in our portfolio of offerings, we believe that we continue to be well-positioned to assist our customers in this improving environment.
Chemical
The chemical industry represented approximately 24% and 22% of our bookings in 2020 and 2019, respectively. The chemical industry is comprised of petrochemical, specialty chemical and pharmaceutical products. Capital spending in 2020 decreased materially primarily due to the pandemic's negative impact on demand for chemical products. The aftermarket opportunities also materially decreased in 2020 due to deferred spending of our customers' repair and maintenance budgets and pandemic related challenges accessing our customers’ facilities.
The outlook for the chemical industry remains heavily dependent on global economic conditions. As global economies and unemployment conditions improve, a rise in consumer spending should follow. An increase in spending would drive greater demand for petrochemical, specialty chemical and pharmaceutical products supporting improved levels of capital investment. We believe the chemical industry will continue to invest in North America and Middle East capacity additions, maintenance and upgrades for optimization of existing assets and that developing regions will selectively invest in capital infrastructure to meet current and future indigenous demand. We believe our global presence and our localized aftermarket capabilities are well-positioned to serve the potential growth opportunities in this industry.
Power Generation
The power generation industry represented approximately 13% and 11% of our bookings in 2020 and 2019, respectively. In 2020, the power generation industry continued to experience softness in thermal power generation capital spending in the mature and key developing markets. China continued to curtail the construction of new coal-fired power generation over the last year, while in India and southeast Asia capital investment remained in place driven by increased demand forecasts.
Natural gas-fired combined cycle (“NGCC”) plants increased their share of the energy mix, driven by market prices for gas remaining low and stable (partially due to the increasing global availability of liquefied natural gas (“LNG”)), low capital expenditures, and the ability of NGCC to stabilize unpredictable renewable sources. With the potential of unconventional sources of gas, the global power generation industry is forecasting an increased use of this form of fuel for power generation plants.
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Despite fewer new nuclear plants being constructed in recent years, nuclear power remains an important contributor to the global energy mix. We continue to support our significant installed base in the global nuclear fleet by providing aftermarket and life extension products and services. Due to our extensive history, we believe we are well positioned to take advantage of this ongoing source of aftermarket and new construction opportunities.
Political efforts to limit the emissions of carbon dioxide may have some adverse effect on thermal power investment plans depending on the potential requirements imposed and the timing of compliance by country. However, many proposed methods of capturing and limiting carbon dioxide emissions offer business opportunities for our products and services. At the same time, we continue to take advantage of new investments in concentrated solar power generating capacity, where our pumps, valves, and seals are uniquely positioned for both molten salt applications as well as the traditional steam cycle.
We believe the long-term fundamentals for the power generation industry remain solid based on projected increases in demand for electricity driven by global population growth, growth of urbanization in developing markets and the increased use of electricity driven transportation. We also believe that our long-standing reputation in the power generation industry, our portfolio of offerings for the various generating methods, our advancements in serving the renewable energy market and carbon capture methodologies, as well as our global service and support structure, position us well for the future opportunities in this important industry.
Water Management
The water management industry represented approximately 3% and 4% of our bookings in 2020 and 2019, respectively. Water management industry activity levels decreased in 2020 primarily due to the pandemic's negative impact on government budgets across the globe. Worldwide demand for fresh water, water treatment and re-use, desalination and flood control are expected to create requirements for new facilities or for upgrades of existing systems, many of which require products that we offer, particularly pumps. With improved management of the pandemic, we expect capital and aftermarket spending to rise in developed and emerging markets with governments and private industry providing funding for critical projects when their priorities shift away from pandemic-management.
The proportion of people living in regions that find it difficult to meet water requirements is expected to double by 2025. We believe that the persistent demand for fresh water during all economic cycles supports continued investments, especially in North America and developing regions.
General Industries
General industries represented, in the aggregate, approximately 26% and 22% of our bookings in 2020 and 2019, respectively. General industries comprise a variety of different businesses, including mining and ore processing, pulp and paper, food and beverage and other smaller applications, none of which individually represented more than 5% of total bookings in 2020 and 2019. General industries also include sales to distributors, whose end customers operate in the industries we primarily serve. Sales to distributors in 2020 were negatively impacted by decreased upstream oil and gas activity in North America.
The outlook for this group of industries is heavily dependent upon the condition of global economies and consumer confidence levels. The long-term fundamentals of many of these industries remain sound, as many of the products produced by these industries are common staples of industrialized and urbanized economies. We believe that our specialty product offerings designed for these industries and our aftermarket service capabilities will provide continued business opportunities.
Outlook for 2021
As the headwinds experienced during the year continue to impact our business, we experienced approximately a 20% decline in bookings as compared to the same period in 2019, with less of an impact on revenue, which declined approximately 5% as compared to the same period in 2019. We anticipate further pressure on revenue with a year over year decline of approximately 4% to 7% in 2021 as a result of lower bookings in 2020, resulting in lower customer backlog as we enter 2021. Despite these effects, however, we expect to maintain adequate liquidity over the next 12 months as we manage through the current market environment. We will continue to actively monitor the potential impacts of COVID-19 and related events on the credit markets in order to maintain sufficient liquidity and access to capital throughout 2021.
Our future results of operations and other forward-looking statements contained in this Annual Report, including this MD&A, involve a number of risks and uncertainties — in particular, the statements regarding our goals and strategies, new product introductions, plans to cultivate new businesses, future economic conditions, revenue, pricing, gross profit margin
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and costs, capital spending, expected cost savings from our transformation and realignment programs, global economic and political risk, depreciation and amortization, research and development expenses, potential impairment of assets, tax rate and pending tax and legal proceedings. Our future results of operations may also be affected by employee incentive compensation including our annual program and the amount, type and valuation of share-based awards granted, as well as the amount of awards forfeited due to employee turnover. In addition to the various important factors discussed above, a number of other factors could cause actual results to differ materially from our expectations. See the risks described in "Item 1A. Risk Factors" as well as the section titled “Forward-Looking Information is Subject to Risk and Uncertainty” of this Annual Report.
Our bookings were $3,411.6 million during 2020. Because a booking represents a contract that can be, in certain circumstances, modified or canceled, and can include varying lengths between the time of booking and the time of revenue recognition, there is no guarantee that bookings will result in comparable revenues or otherwise be indicative of future results.
On December 31, 2020, we had $1,701.5 million of fixed-rate Senior Notes outstanding. We expect our interest expense in 2021 will be modestly higher compared with amounts incurred in 2020. Our results of operations may also be impacted by unfavorable foreign currency exchange rate movements. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of this Annual Report.
We expect to generate sufficient cash from operations and have sufficient capacity under our Senior Credit Facility to fund our working capital, capital expenditures, dividend payments, share repurchases, debt payments and pension plan contributions in 2021. The amount of cash generated or consumed by working capital is dependent on our level of revenues, customer cash advances, backlog, customer-driven delays and other factors. We will seek to improve our working capital utilization, with a particular focus on improving the management of accounts receivable and inventory. In 2021, our cash flows for investing activities will be focused on strategic initiatives, information technology infrastructure, general upgrades and cost reduction opportunities and we currently estimate capital expenditures to be between $70 million and $80 million, before consideration of any acquisition activity.
We currently anticipate that our minimum contribution to our qualified U.S. pension plan will be approximately $20 million, excluding direct benefits paid, in 2021 in order to maintain fully-funded status as defined by applicable law. We currently anticipate that our contributions to our non-U.S. pension plans will be approximately $2 million in 2021, excluding direct benefits paid.
OUR RESULTS OF OPERATIONS
Throughout this discussion of our results of operations, we discuss the impact of fluctuations in foreign currency exchange rates. We have calculated currency effects on operations by translating current year results on a monthly basis at prior year exchange rates for the same periods.
In October 2020, we entered into a settlement agreement with two insurance companies providing coverage for one of our heritage companies. Given the size of the settlement, and as part of the third quarter close process, we re-evaluated our accounting for asbestos-related matters and evaluated the amount of receivables that were currently recorded. We made certain adjustments primarily related to an incurred but not reported ("IBNR") liability associated with unasserted asbestos claims, but also included adjustments related to the associated receivables for expected insurance proceeds for asbestos settlement and defense costs from insurance coverage and the recognition as an expense the related legal fees that were previously estimated to be recoverable from insurance carriers for which coverage is not currently sufficient following the recognition of the IBNR for periods beginning with the year ended December 31, 2014 through the second quarter of 2020 and to correct certain other previously identified immaterial errors. These errors, individually and in the aggregate, are not material to any prior annual or interim period. However, the aggregate amount of the prior period errors would have been material to our quarterly results for the period ended September 30, 2020 and the results for the year ended December 31, 2020 and therefore we have revised our previously issued financial statements for the fiscal years ended December 31, 2019 and 2018. Refer to Note 2 to our consolidated financial statements included in this Annual Report for more information.
Realignment Activity
In the second quarter of 2018, we launched and committed resources to our Flowserve 2.0 Transformation, a program designed to transform our business model to drive operational excellence, reduce complexity, accelerate growth,
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improve organizational health and better leverage our existing global platform, which is further discussed in Note 22 to our consolidated financial statements included in Item 8 of this Annual Report. We anticipate that the Flowserve 2.0 Transformation will result in further restructuring charges, non-restructuring charges and other related transformation expenses. The Flowserve 2.0 Transformation expenses incurred primarily consist of professional services, project management and related travel costs recorded in SG&A expenses. For the year ended December 31, 2020 and 2019, we incurred Flowserve 2.0 Transformation related expenses of $22.7 million and $28.0 million, respectively.
In the second quarter of 2020, we identified and initiated certain realignment activities resulting from our Flowserve 2.0 Transformation Program to right-size our organizational operations based on the current business environment, with the overall objective to reduce our workforce costs. We anticipate a total investment in 2020 Realignment Program activities of approximately $80 million and that the majority of the charges were incurred in 2020 with the remainder to be incurred in early 2021. Based on actions initiated in 2020, we estimate that we have achieved cost savings of approximately $41 million as of December 31, 2020, with approximately $16 million of those savings in COS and approximately $25 million SG&A. Upon completion of the 2020 Realignment Program activities, we expect full year run-rate cost savings of approximately $100 million. Actual savings could vary from expected savings, which represent management’s best estimate to date. There are certain other realignment activities that are currently being evaluated, but have not yet been finalized. The realignment programs initiated in 2015 ("2015 Realignment Programs"), which consisted of both restructuring and non-restructuring charges, were substantially complete as of March 31, 2020, resulting in $362.4 million of total charges incurred through the completion of the programs.
The total charges incurred in 2020 related to our 2020 Realignment Program activities and Flowserve 2.0 Transformation by segment and the charges incurred in 2019 related to our 2015 Realignment Programs and Flowserve 2.0 Transformation by segment are presented in the following tables:
Total Realignment and Transformation Program Charges
Total Realignment and Transformation Program Charges
_________________________
(1) Includes gains from the sales of non-strategic manufacturing facilities that are included in our Realignment Programs.
(2) Income tax expense (benefit) includes exit taxes.
Bookings and Backlog
(Amounts in millions)
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We define a booking as the receipt of a customer order that contractually engages us to perform activities on behalf of our customer in regard to the manufacture, delivery, and/or support of products or the delivery of service. Bookings recorded and subsequently canceled within the same fiscal period are excluded from reported bookings. Bookings of $3.4 billion in 2020 decreased by $826.7 million, or 19.5%, as compared with 2019. The decrease included negative currency effects of approximately $24 million. The decrease was driven by lower bookings in the oil and gas, chemical, general, power generation and water management industries. Customer bookings were down significantly in both aftermarket and original equipment, which have decreased in light of the impacts of COVID-19 on customer spending and distressed oil prices on these industries.
Bookings of $4.2 billion in 2019 increased by $218.5 million, or 5.4%, as compared with 2018. The increase included negative currency effects of approximately $108 million. The increase was primarily driven by customer original equipment bookings. The increase was driven by higher bookings in the oil and gas, power generation, chemical and water management industries, partially offset by decreased bookings in the general industries. Bookings in 2018 included approximately $31 million related to the two FPD locations and associated product lines that were divested in the third quarter of 2018.
Backlog represents the aggregate value of booked but uncompleted customer orders and is influenced primarily by bookings, sales, cancellations and currency effects. Backlog of $1.9 billion at December 31, 2020 decreased by $302.1 million, or 14.0%, as compared with December 31, 2019. Currency effects provided an increase of approximately $54 million (currency effects on backlog are calculated using the change in period end exchange rates). Backlog related to aftermarket orders was approximately 36% and 33% of the backlog at December 31, 2020 and 2019, respectively. We expect to recognize revenue on approximately 90% of December 31, 2020 backlog during 2021. Backlog includes our unsatisfied (or partially unsatisfied) performance obligations related to contracts having an original expected duration in excess of one year of approximately $541 million as discussed in Note 3 to our consolidated financial statements included in Item 8 of this Annual Report.
Backlog of $2.2 billion at December 31, 2019 increased by $265.4 million, or 14.0%, as compared with December 31, 2018. Currency effects provided an increase of less than $1 million (currency effects on backlog are calculated using the change in period end exchange rates). Backlog related to aftermarket orders was approximately 33% and 36% of the backlog at December 31, 2019 and 2018, respectively. We expected to recognize revenue on approximately 88% of December 31, 2019 backlog during 2020.
Sales
(Amounts in millions)
Sales in 2020 decreased by $211.6 million, or 5.4%, as compared with 2019. The decrease included negative currency effects of approximately $17 million. The decrease in sales was primarily driven by aftermarket sales, with decreased sales into North America, Europe, Africa, Latin America and Asia Pacific, partially offset by increased sales into the Middle East.
Sales in 2019 increased by $104.0 million, or 2.7%, as compared with 2018. The increase included negative currency effects of approximately $94 million. The increase was more heavily-weighted to aftermarket sales, with increased sales into North America, Europe and Asia Pacific, partially offset by decreased sales into Latin America, Africa and the Middle East. Sales in 2018 included approximately $30 million related to the two FPD locations and associated product lines that were divested in the third quarter of 2018.
Sales to international customers, including export sales from the U.S., were approximately 65% of total sales in 2020 and 63% in both 2019 and 2018. Sales into Europe, the Middle East and Africa ("EMA") were approximately 33% of total sales in 2020, 32% in both 2019 and 2018. Sales into Asia Pacific were approximately 22% of total sales for 2020, 21% for 2019 and 20% for 2018. Sales into Latin America were approximately 6% of total sales in 2020, 2019 and 2018.
Gross Profit and Gross Profit Margin
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(Amounts in millions, except percentages)
Gross profit in 2020 decreased by $172.5 million, or 13.4%, as compared with 2019. Gross profit margin in 2020 of 30.0% decreased from 32.7% in 2019. The decrease in gross profit margin was primarily due to a sales mix shift to lower margin original equipment sales, revenue recognized on lower margin original equipment orders as compared to the same period in 2019, increased realignment charges associated with our 2020 Realignment Program and the unfavorable impact of underutilized capacity from the COVID-19 pandemic resulting in $15.0 million of manufacturing costs being expensed and other related costs, partially offset by increased savings related to our 2020 Realignment Program. Aftermarket sales represented approximately 49%of total sales, as compared with approximately 50% of total sales for the same period in 2019.
Gross profit in 2019 increased by $98.4 million, or 8.3%, as compared with 2018. Gross profit margin in 2019 of 32.7% increased from 31.0% in 2018. The increase in gross profit margin was primarily attributed to the favorable impact of revenue recognized on higher margin projects, lower realignment charges associated with our Realignment Programs, improvements in operational efficiency and a $7.7 million charge related to the write-down of inventory in the second quarter of 2018 that did not recur. Aftermarket sales represented approximately 50% of total sales in both 2019 and 2018.
SG&A
(Amounts in millions, except percentages)
SG&A as a percentage of sales 23.6 % 23.2 % 25.2 %
SG&A in 2020 decreased by $35.0 million, or 3.8%, as compared with 2019. Currency effects yielded a decrease of approximately $1 million. In 2020, SG&A as a percentage of sales increased 40 basis points as compared with the same period in 2019. The decrease in in SG&A, including currency, was due to a decrease in travel and selling-related expenses and increased savings related to our 2020 Realignment Program, partially offset by increased charges related to our 2020 Realignment Program as compared to the same period in 2019 and an $8.5 million write-down of accounts receivables and contract assets related to a contract with an oil and gas customer in Latin America during the first quarter of 2020.
SG&A in 2019 increased by $53.4 million, or 5.5%, as compared with 2018. Currency effects yielded a decrease of approximately $18 million. In 2019, SG&A as a percentage of sales decreased 200 basis points as compared with the same period in 2018 primarily due to lower charges related to our Flowserve 2.0 Transformation and Realignment Programs, decreased broad-based annual incentive compensation expense, gains from the sales of non-strategic manufacturing facilities during the year, favorable impacts resulting from the 2018 divestiture of two FPD locations and a $9.7 million impairment charge related to long-lived assets in the second quarter of 2018 that did not recur.
Loss on Sale of Business
(Amounts in millions)
Loss on sale of business $ — $ — $ (7.7)
The loss on sale of business in 2018 of $7.7 million resulted from the divestiture of two FPD locations and related product lines. See Note 4 to our consolidated financial statements included in Item 8 of this Annual Report for additional information on this sale.
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Net Earnings from Affiliates
(Amounts in millions)
Net earnings from affiliates $ 11.8 $ 10.5 $ 11.1
Net earnings from affiliates represents our net income from investments in six joint ventures (one located in each of Chile, China, India, Saudi Arabia, South Korea and the United Arab Emirates) that are accounted for using the equity method of accounting. Net earnings from affiliates in 2020 increased by $1.3 million, or 12.4%, as compared to the prior year, primarily as a result of increased earnings of our FPD joint venture in South Korea. Net earnings from affiliates in 2019 decreased by $0.6 million, or 5.4%, as compared to the prior year, primarily as a result of decreased earnings of our FPD joint venture in India.
Operating Income
(Amounts in millions, except percentages)
Operating income as a percentage of sales 6.7 % 9.8 % 5.9 %
Operating income in 2020 decreased by $136.3 million, or 35.3%, as compared with 2019. The decrease included negative currency effects of approximately $9 million. The decrease was primarily a result of the $172.5 million decrease in gross profit, partially offset by the $35.0 million decrease in SG&A.
Operating income in 2019 increased by $158.9 million, or 69.8%, as compared with 2018. The increase included negative currency effects of approximately $12 million. The increase was primarily as result of the $98.4 million increase in gross profit driven primarily by reduced demand and other impacts of the pandemic, as well as reduced oil prices, the $53.4 million decrease in SG&A and the loss of $7.7 million from the divestiture of two FPD locations and related product lines in the third quarter of 2018 that did not recur.
Interest Expense and Interest Income
(Amounts in millions)
Interest expense in 2020 increased by $2.4 million as compared with 2019. The increase was primarily attributable to interest expense associated with the senior notes issued in the third quarter of 2020, partially offset by the net impact of our partial tender of our 1.250% EUR Senior Notes due 2022 ("2022 Euro Senior Notes"). Interest income in 2020 decreased by $4.2 million as compared to 2019. The decrease in interest income was partially due to lower interest rates on our average cash balances compared with same period in 2019.
Interest expense in 2019 decreased by $3.2 million as compared with 2018. The decrease was primarily attributable to lower borrowings in 2019 and currency impacts on interest expense associated with our outstanding Euro-denominated senior notes, as compared to the same period in 2018. Interest income in 2019 increased by $1.9 million as compared to 2018. The increase in interest income was primarily attributed to higher average cash balances compared with same period in 2018.
Other Income (Expense), net
(Amounts in millions)
Other income (expense), net $ (10.3) $ (17.6) $ (19.6)
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Other expense, net decreased $7.3 million as compared to 2019, due to a $12.4 million increase in gains from transactions in currencies other than our sites' functional currencies, partially offset by a $3.8 million increase in losses from foreign exchange contracts. The net change was primarily due to the foreign currency exchange rate movements in the Canadian dollar, Mexican peso, Euro and Brazilian real in relation to the U.S. dollar during the year ended December 31, 2020, as compared with the same period in 2019.
Other expense, net decreased $2.0 million in 2019, due to a $7.6 million decrease in losses from transactions in currencies other than our sites' functional currencies, partially offset by a $3.3 million increase in losses from foreign exchange contracts. The net change was primarily due to the foreign currency exchange rate movements in the Euro, Indian rupee, Singapore dollar and Mexican peso in relation to the U.S. dollar during the year ended December 31, 2019, as compared with the same period in 2018.
Tax Expense and Tax Rate
(Amounts in millions, except percentages)
Provision for income taxes $ 60.0 $ 75.5 $ 46.6
Our effective tax rate of 32.1% for the year ended December 31, 2020 increased from 23.4% in 2019 primarily due to the establishment of a valuation allowance against certain deferred tax assets given the current and anticipated impact to the Company's operations resulting from the COVID-19 pandemic and the distressed oil prices. The 2020 effective tax rate differed from the federal statutory rate of 21% primarily due to the establishment of a valuation allowance described above. The 2019 effective tax rate differed from the federal statutory rate of 21% primarily due to state tax and foreign audit assessments, partially offset by the net impact of foreign operations. The 2018 effective tax rate differed from the federal statutory rate of 21% primarily due to the net impact of foreign operations, including losses in certain foreign jurisdictions for which no tax benefit was provided.
Our effective tax rate is based upon current earnings and estimates of future taxable earnings for each domestic and international location. Changes in any of these and other factors, including our ability to utilize foreign tax credits and net operating losses or results from tax audits, could impact the tax rate in future periods. As of December 31, 2020, we have foreign tax credits of $35.9 million, expiring in 2026 and 2028-2030 tax years, against which we recorded a valuation allowance of $35.9 million. Additionally, we have recorded other net deferred tax assets of $30.5 million, which relate to net operating losses, tax credits and other deductible temporary differences that are available to reduce taxable income in future periods, most of which do not have a definite expiration. Should we not be able to utilize all or a portion of these credits and losses, our effective tax rate would increase.
Net Earnings and Earnings Per Share
(Amounts in millions, except per share amounts)
Net earnings attributable to Flowserve Corporation $ 116.3 $ 238.8 $ 104.5
Net earnings per share — diluted $ 0.89 $ 1.81 $ 0.80
Net earnings in 2020 decreased by $122.5 million to $116.3 million, or to $0.89 per diluted share, as compared with 2019. The decrease was primarily attributable to a decrease in operating income of $136.3 million and a $6.6 million increase in interest expense, net, partially offset by a $7.3 million decrease in other expense, net and a $15.5 million decrease in tax expense.
Net earnings in 2019 increased by $134.3 million to $238.8 million, or to $1.81 per diluted share, as compared with 2018. The increase was primarily attributable to an increase in operating income of $158.9 million, a $2.0 million decrease in other expense, net and a $5.1 million decrease in interest expense, net, partially offset by a $28.9 million increase in tax expense.
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Other Comprehensive Income (Loss)
(Amounts in millions)
Other comprehensive income (loss) $ (9.0) $ (9.8) $ (67.8)
Other comprehensive income (loss) in 2020 decreased by $0.8 million from a loss of $9.8 million in 2019. The decreased loss was primarily due to foreign currency translation adjustments resulting primarily from exchange rate movements of the Euro, Chinese yuan, British pound and Canadian dollar versus the U.S. dollar at December 31, 2020 as compared with 2019.
Other comprehensive income (loss) in 2019 decreased by $58.0 million as compared with 2018. The decreased loss was primarily due to foreign currency translation adjustments resulting primarily from exchange rate movements of the Euro, British pound, Chinese yuan and Indian rupee versus the U.S. dollar at December 31, 2019 as compared with 2018.
Business Segments
We conduct our operations through two business segments based on type of product and how we manage the business. We evaluate segment performance and allocate resources based on each segment’s operating income. See Note 20 to our consolidated financial statements included in Item 8 of this Annual Report for further discussion of our segments. The key operating results for our two business segments, FPD and FCD, are discussed below.
Flowserve Pump Division Segment Results
Our largest business segment is FPD, through which we design, manufacture, pre-test, distribute and service specialty and highly-engineered custom and pre-configured pumps and pump systems, mechanical seals and auxiliary systems (collectively referred to as "original equipment"). FPD includes longer lead time, highly-engineered pump products and mechanical seals that are generally manufactured within shorter lead times. FPD also manufactures replacement parts and related equipment and provides aftermarket services. FPD primarily operates in the oil and gas, petrochemical, chemical, power generation, water management and general industries. FPD operates in 48 countries with 39 manufacturing facilities worldwide, 13 of which are located in Europe, 12 in North America, eight in Asia Pacific and six in Latin America, and we have 137 QRCs, including those co-located in manufacturing facilities and/or shared with FCD.
FPD
(Amounts in millions, except percentages)
Loss on sale of business — — (7.7)
Segment operating income as a percentage of sales 10.1 % 12.7 % 7.7 %
Bookings in 2020 decreased by $649.5 million, or 21.6%, as compared with 2019. The decrease included negative currency effects of approximately $20 million. The decrease in customer bookings was driven by decreased orders in the oil and gas, chemical, power generation and general industries. Decreased customer bookings of $288.0 million into North America, $146.8 million into the Middle East, $79.9 million into Asia Pacific, $68.1 million into Europe, $39.1 million into Africa and $21.6 million into Latin America. The decrease in customer bookings was primarily driven by customer original equipment bookings which have decreased in light of the impacts of COVID-19 on customer spending and distressed oil prices on these industries.Interdivision bookings (which are eliminated and are not included in consolidated
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bookings as disclosed above) increased $3.1 million. Of the $2.4 billion of bookings in 2020, approximately 37% were from oil and gas, 27% from general industries, 20% from chemical, 12% from power generation and 4% from water management.
Bookings in 2019 increased by $254.4 million, or 9.2%, as compared with 2018. The increase included negative currency effects of approximately $79 million. Bookings in 2018 included approximately $31 million related to the two FPD locations and associated product lines that were divested in the third quarter of 2018. The increase in customer bookings was primarily driven by the oil and gas, chemical and power generation industries, partially offset by decreased bookings in the general industries. Increased customer bookings of $100.4 million into North America, $78.1 million into the Middle East, $72.1 million into Asia Pacific, $18.6 million in Latin America and $11.5 million into Africa, were partially offset by decreased customer bookings of $49.9 million into Europe. The increase was primarily driven by customer original equipment bookings. Of the $3.0 billion of bookings in 2019, approximately 44% were from oil and gas, 22% from general industries, 19% from chemical, 10% from power generation and 5% from water management.
Sales in 2020 decreased $30.6 million, or 1.1%, as compared with 2019. The decrease included negative currency effects of approximately $19 million. The decrease was driven by aftermarket sales, resulting from decreased customer sales of $43.6 million into North America, $16.3 million into Africa, $13.5 million into Europe and $10.2 million into Latin America, partially offset by increased sales of $39.4 million into Asia Pacific and $20.7 million into the Middle East.
Sales in 2019 increased $83.0 million, or 3.2%, as compared with 2018. The increase included negative currency effects of approximately $66 million. Sales in 2018 included approximately $30 million related to the two FPD locations and associated product lines that were divested in the third quarter of 2018. The increase was primarily driven by aftermarket sales, resulting from increased customer sales of $45.3 million into North America, $28.6 million into Europe, $16.8 million into the Middle East and $8.8 million into Africa, partially offset by decreased sales of $17.8 million into Latin America and $4.0 million into Asia Pacific.
Gross profit in 2020 decreased by $87.9 million, or 9.8%, as compared with 2019. Gross profit margin in 2020 of 30.3% decreased from 33.2% in 2019. The decrease in gross profit margin was primarily due to a sales mix shift to lower margin original equipment sales as compared to the same period in 2019, the increased charges related to our 2020 Realignment Program and the unfavorable impact of underutilized capacity from the COVID-19 pandemic resulting in $9.2 million of manufacturing costs being expensed and other related costs, partially offset by increased savings related to our 2020 Realignment Program.
Gross profit in 2019 increased by $123.6 million, or 15.9%, as compared with 2018. Gross profit margin in 2019 of 33.2% increased from 29.6% in 2018. The increase in gross profit margin was primarily attributable to revenue recognized on higher margin projects, lower realignment charges associated with our Realignment Programs, sales mix shift to higher margin aftermarket sales, improvements in operational efficiency and a $7.7 million charge related to the write-down of inventory in the second quarter of 2018 that did not recur.
SG&A in 2020 decreased by $14.1 million, or 2.5%, as compared with 2019. Currency effects provided a decrease of approximately $1 million. The decrease in SG&A, including currency, was due to favorable impacts on SG&A due to a decrease in travel and selling-related expenses, increased savings related to our 2020 Realignment Program as compared to the same period in 2019 and the favorable impacts resulting from gains from the sales of non-strategic manufacturing facilities in the first quarter of 2019 that did not recur, partially offset by an $8.5 million write-down of accounts receivables and contract assets related to a contract with an oil and gas customer in Latin America during the first quarter of 2020.
SG&A in 2019 decreased by $12.6 million, or 2.2%, as compared with 2018. Currency effects provided a decrease of approximately $13 million. The decrease in SG&A, including currency, was due to favorable impacts on SG&A due to gains from the sales of non-strategic manufacturing facilities during the year, the 2018 divestiture of two FPD locations and a $9.7 million impairment charge related to the long-lived assets in the second quarter of 2018 that did not recur, partially offset by an increase in selling-related expenses and collections of previously reserved bad debts in 2018 that did not recur.
The loss on sale of business in 2018 of $7.7 million resulted from the divestiture of two FPD locations and related product lines. See Note 4 to our consolidated financial statements included in Item 8 of this Annual Report for additional information on this sale.
Operating income in 2020 decreased by $72.5 million, or 21.1%, as compared with 2019. The decrease included negative currency effects of approximately $9 million. The decrease was due to the $87.9 million decrease in gross profit, partially offset by the $14.1 million decrease in SG&A.
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Operating income in 2019 increased by $142.5 million, or 70.9%, as compared with 2018. The increase included negative currency effects of approximately $10 million. The increase was due to the $123.6 million increase in gross profit, the $12.6 million decrease in SG&A and the $7.7 million loss from the divestiture of two FPD locations and related product lines in the third quarter of 2018 that did not recur.
Backlog of $1.2 billion at December 31, 2020 decreased by $324.0 million, or 20.8%, as compared with December 31, 2019. Currency effects provided an increase of approximately $36 million. Backlog of $1.6 billion at December 31, 2019 increased by $274.7 million, or 21.4%, as compared with December 31, 2018. Currency effects provided an increase of approximately $5 million.
Flow Control Division Segment Results
FCD designs, manufactures, distributes and services a broad portfolio of engineered and industrial valve and automation solutions, including isolation and control valves, actuation, controls and related equipment. FCD leverages its experience and application know-how by offering a complete menu of engineering and project management services to complement its expansive product portfolio. FCD has a total of 48 manufacturing facilities and QRCs in 22 countries around the world, with five of its 21 manufacturing operations located in the U.S., 10 located in Europe, five located in Asia Pacific and one located in Latin America. We believe that FCD is the second largest industrial valve supplier in the world.
FCD
(Amounts in millions, except percentages)
Segment operating income as a percentage of sales 11.9 % 15.5 % 16.8 %
Bookings in 2020 decreased $175.1 million, or 14.1%, as compared with 2019. The decrease included negative currency effects of approximately $3.4 million. The decrease was driven by lower bookings in the oil and gas, general, chemical and power generation industries. Decreased customer bookings of $140.9 million into North America, $33.4 million into Europe, $20.4 million into the Middle East and $9.0 million into Africa, were partially offset by increased bookings of $17.5 million into Asia Pacific and $6.7 million into Latin America. The decrease was more heavily weighted towards original equipment bookings. Of the $1.1 billion of bookings in 2020, approximately 31% were from chemical, 29% were from oil and gas, 25% from general industries and 15% from power generation.
Bookings in 2019 decreased $33.4 million, or 2.6%, as compared with 2018. The decrease included negative currency effects of approximately $29 million. The decrease in customer bookings in the general and chemical industries were partially offset by increases in the power generation, oil and gas and water management industries. Decreased customer bookings of $27.3 million into North America, $8.2 million into Asia Pacific and $2.6 million into Europe were partially offset by increased bookings of $24.1 million into the Middle East. The decrease was more heavily weighted towards customer aftermarket bookings. Of the $1.2 billion of bookings in 2019, approximately 34% were from oil and gas, 29% from chemical, 24% from general industries and 13% from power generation.
Sales in 2020 decreased by $181.4 million, or 14.6%, as compared with 2019. The decrease included currency benefits of approximately $1 million and was primarily driven by decreased customer original equipment sales. Sales decreased $113.9 million into North America, $45.9 million into Asia Pacific, $32.0 million into Europe and $2.6 million into Latin America and were partially offset by increased customer sales of $8.8 million into the Middle East and $2.7 million into Africa.
Sales in 2019 increased by $20.1 million, or 1.6%, as compared with 2018. The increase included negative currency effects of approximately $28 million and was driven by increased customer original equipment sales. Sales increased $40.2
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million into Asia Pacific, $17.6 million into Europe, $6.5 million into Latin America and $3.5 million into North America and were partially offset by decreased customer sales of $23.5 million into the Middle East and $15.9 million into Africa.
Gross profit in 2020 decreased by $83.6 million, or 20.6%, as compared with 2019. Gross profit margin in 2020 of 30.4% decreased from 32.7% in 2019. The decrease in gross profit margin was primarily due to lower sales volume and revenue recognized on lower margin original equipment orders as compared to the same period in 2019, increased charges related to our 2020 Realignment Program and the unfavorable impact of underutilized capacity from the COVID-19 pandemic resulting in $5.8 million of manufacturing costs and other related costs being expensed, partially offset by increased savings related to our 2020 Realignment Program.
Gross profit in 2019 decreased by $14.4 million, or 3.4%, as compared with 2018. Gross profit margin in 2019 of 32.7% decreased from 34.5% in 2018. The decrease in gross profit margin was primarily attributed to a mix shift to more original equipment sales and revenue recognized on lower margin original equipment orders as compared to the same period in 2018.
SG&A in 2020 decreased by $17.3 million, or 8.1% as compared with 2019. Currency effects provided a decrease of less than $1 million. The decrease in SG&A was primarily due to increased savings related to our 2020 Realignment Program as compared to the same period in 2019 and a decrease in travel and selling-related expenses from our cost saving initiatives in response to COVID-19.
SG&A in 2019 decreased by $1.4 million, or 0.7% as compared with 2018. Currency effects provided a decrease of approximately $4 million. The decrease in SG&A was primarily due to currency effects as compared to 2018.
Operating income in 2020 decreased by $66.3 million, or 34.5%, as compared with 2019. The decrease included negative currency effects of less than $1 million. The decrease was primarily due to the $83.6 million decrease in gross profit, partially offset by the decrease in SG&A of $17.3 million.
Operating income in 2019 decreased by $12.3 million, or 6.0%, as compared with 2018. The decrease included negative currency effects of approximately $3 million. The decrease was primarily due to the $14.4 million decrease in gross profit, partially offset by the decrease in SG&A of $1.4 million.
Backlog of $623.1 million at December 31, 2020 increased by $23.1 million, or 3.9%, as compared with December 31, 2019. Currency effects provided an increase of approximately $19 million. Backlog of $600.0 million at December 31, 2019 decreased by $8.4 million, or 1.4%, as compared with December 31, 2018. Currency effects provided a decrease of approximately $5 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Analysis
(Amounts in millions)
Net cash flows provided (used) by operating activities $ 310.5 $ 324.1 $ 190.8
Net cash flows provided (used) by investing activities (41.7) (33.4) (81.5)
Net cash flows provided (used) by financing activities 147.6 (231.5) (173.3)
Existing cash, cash generated by operations and borrowings available under our senior credit facility are our primary sources of short-term liquidity. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. Our sources of operating cash generally include the sale of our products and services and the conversion of our working capital, particularly accounts receivable and inventories. Our total cash balance at December 31, 2020 was $1,095.3 million, compared with $671.0 million at December 31, 2019 and $619.7 million at December 31, 2018.
Our cash provided by operating activities was $310.5 million, $324.1 million and $190.8 million in 2020, 2019 and 2018, respectively, which provided cash to support short-term working capital needs. Cash flow provided by working capital increased in 2020 due primarily to cash provided by lower accounts receivable of $45.6 million, higher accrued liabilities and income taxes payable of $50.2 million, lower inventory of $15.3 million and lower contract assets, net of $4.3 million, partially offset by cash used by lower accounts payable of $22.6 million and lower contract liabilities of $34.1
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million. Cash flow used by working capital increased in 2019 due primarily to cash used by higher contract assets of $45.2 million, higher inventory of $31.1 million, lower accounts receivables of $2.9 million and lower accrued liabilities and income taxes payable of $12.4 million, partially offset by cash provided by higher contract liabilities of $19.7 million. During 2020, we contributed $15.9 million to our defined benefit pension plans as compared to $37.3 million in 2019.
Decreases in accounts receivable provided $45.6 million and $2.9 million of cash flow in 2020 and 2019, respectively, as compared with cash flow used of $25.4 million in 2018. For the fourth quarter of 2020 our days' sales outstanding ("DSO") was 69 days as compared to 67 days for 2019 and 72 days for 2018. We have not experienced a significant increase in customer payment defaults in 2020.
Decreases in inventory provided $15.3 million of cash flow in 2020, as compared with cash used of $31.1 million and $29.3 million in 2019 and 2018, respectively. The cash used from inventory in 2019 was due to an increase in raw materials and work in process. Inventory turns were 4.1 times at December 31, 2020, as compared with 4.3 times for 2019 and 4.2 times for 2018. Our calculation of inventory turns does not reflect the impact of advanced cash received from our customers.
Decreases in contract assets provided $4.3 million of cash flow and decreases in contact liabilities used $34.1 million of cash flow in 2020. Increases in contract assets used $45.2 million of cash flow and increases in contact liabilities provided $19.7 million of cash flow in 2019.
Decreases in accounts payable used $22.6 million of cash flow in 2020 compared with cash provided of $24.7 million and $7.6 million in 2019 and 2018, respectively. Increases in accrued liabilities and income taxes payable provided $50.2 million of cash flow in 2020 compared to $12.4 million 2019 and cash used of $15.2 million in 2018.
Cash used by investing activities were $41.7 million in 2020, as compared to $33.4 million and $81.5 million in 2019 and 2018, respectively. The increase of cash used in 2020 was primarily due to lower proceeds provided from the disposal of assets during the year of $13.8 million, compared to $42.3 million in 2019. Capital expenditures were $57.4 million, $75.7 million and $84.0 million in 2020, 2019 and 2018, respectively. In 2021, we currently estimate capital expenditures to be between $70 million and $80 million, before consideration of any acquisition activity.
Cash provided by financing activities were $147.6 million in 2020 compared to cash flow used of $231.5 million and $173.3 million in 2019 and 2018, respectively. Cash inflows during 2020 resulted primarily from the $498.3 million in net proceeds from the issuance of the senior notes due October 1, 2030 ("2030 Senior Notes"), partially offset by a $191.3 million in payments on long-term debt resulting from our partial tender offer of our 2022 Euro Senior Notes, $104.2 million of dividend payments and the repurchase of $15.0 million of our common stock. Cash outflows during 2019 resulted primarily from $105.0 million in payments on long-term debt and $99.6 million of dividend payments. Cash outflows during 2018 resulted primarily from $99.4 million of dividend payments and $60.0 million in payments on long-term debt. On February 17, 2021, we announced that we will redeem the outstanding balance of our 2022 Euro Senior Notes on March 19, 2021. We will use the remaining net proceeds from the public offering of the 2030 Senior Notes for the redemption.
In 2020 we repurchased 1,057,115 shares of our outstanding common stock for $32.1 million. As of December 31, 2020, we had $113.6 million of remaining capacity under our share repurchase plan previously approved by the Board of Directors.
Our cash needs for the next 12 months, including for our estimated 2021 capital expenditures described above, are expected to be lower than those of 2020 due to anticipated benefits from working capital reductions and savings from 2020 Realignment Program, discussed in Note 22 to our consolidated financial statements included in Item 8 of this Annual Report. We believe cash flows from operating activities, combined with availability under our senior credit facility and our existing cash balances, will be sufficient to enable us to meet our cash flow needs for the next 12 months. However, cash flows from operations could be adversely affected by a continued decrease in the rate of general global economic growth and an extended decrease in capital spending of our customers, as well as economic, political and other risks associated with sales of our products, operational factors, competition, regulatory actions, fluctuations in foreign currency exchange rates and fluctuations in interest rates, among other factors. We believe that cash flows from operating activities and our expectation of continuing availability to draw upon our credit agreements are also sufficient to meet our cash flow needs for periods beyond the next 12 months.
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Acquisitions and Dispositions
We regularly evaluate acquisition opportunities of various sizes. The cost and terms of any financing to be raised in conjunction with any acquisition, including our ability to raise economical capital, is a critical consideration in any such evaluation.
Note 4 to our consolidated financial statements included in Item 8 of this Annual Report contains a discussion of our disposition activity.
Financing
Our credit agreement provides for a $800.0 million unsecured senior credit facility with a maturity date of July 16, 2024 (“Senior Credit Facility”). The Senior Credit Facility includes a $750.0 million sublimit for the issuance of letters of credit and a $30.0 million sublimit for swing line loans. We have the right to increase the amount of the Senior Credit Facility by an aggregate amount not to exceed $400.0 million, subject to certain conditions, including the approval of the lenders under our Senior Credit Facility of any such increase.
The interest rates per annum applicable to the Senior Credit Facility (other than with respect to swing line loans) are LIBOR plus between 1.000% to 1.750%, depending on our debt rating by either Moody’s Investors Service, Inc. or Standard & Poor’s ("S&P") Ratings, or, at our option, the Base Rate (as defined in the Senior Credit Agreement) plus between 0.000% to 0.750% depending on our debt rating by either Moody’s Investors Service, Inc. or S&P Global Ratings. At December 31, 2020 the interest rate on the Senior Credit Facility was LIBOR plus 1.375% in the case of LIBOR loans and the Base Rate plus 0.375% in the case of Base Rate loans. In addition, a commitment fee is payable quarterly in arrears on the daily unused portions of the Senior Credit Facility. The commitment fee will be between 0.090% and 0.300% of unused amounts under the Senior Credit Facility depending on our debt rating by either Moody’s Investors Service, Inc. or S&P Global Ratings. Certain financing arrangements contain provisions that may result in an event of default if there was a failure under other financing arrangements to meet payment terms. Such provisions are referred to as "cross default" provisions. A discussion of our debt and related covenants is included in Note 13 to our consolidated financial statements included in Item 8 of this Annual Report. We were in compliance with the covenants as of December 31, 2020.
Liquidity Analysis
Our cash balance increased by $424.3 million to $1,095.3 million as of December 31, 2020 as compared with December 31, 2019. The cash increase included $310.5 million in operating cash inflows, $498.3 million in net proceeds from the issuance of the senior notes due October 1, 2030 ("2030 Senior Notes") and $13.8 million from the sale of non-strategic manufacturing facilities that are included in our Realignment Programs, partially offset by $191.3 million in payments on long-term debt, $104.2 million in dividend payments, $57.4 million in capital expenditures and the repurchase of $32.1 million of our common stock. Proceeds received during 2019 included $42.3 million of proceeds from the sale of non-strategic manufacturing facilities that were included in our 2015 Realignment Programs.
At December 31, 2020 and 2019, as a result of the values of the plan’s assets and our contributions to the plan, our U.S. pension plan was fully-funded as defined by applicable law. After consideration of our funded status, we elected to make no contributions attributable to the U.S. pension plan in 2020. As of December 31, 2020 direct benefits paid by the U.S. pension plan were less than $1.0 million. We continue to maintain an asset allocation consistent with our strategy to maximize total return, while reducing portfolio risks through asset class diversification.
COVID-19 Liquidity Update
As of December 31, 2020, we had approximately $1,837 million of liquidity, consisting of cash and cash equivalents of $1,095 million and $742 million of borrowings available under our Senior Credit Facility. In light of the liquidity currently available to us, and the costs savings measures planned and already in place, we expect to be able to maintain adequate liquidity over the next 12 months as we manage through the current market environment. We will continue to actively monitor the potential impacts of COVID-19 and related events on the credit markets in order to maintain sufficient liquidity and access to capital throughout 2020.
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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table presents a summary of our contractual obligations at December 31, 2020:
Payments Due By Period
Within 1 Year 1-3 Years 3-5 Years Beyond 5Years Total
(Amounts in millions)
Leases:
Purchase obligations:(2)
_______________________________________
(1)Fixed interest payments represent interest payments on the Senior Notes as defined in Note 13 to our consolidated financial statements included in Item 8 of this Annual Report.
(2)Purchase obligations are presented at the face value of the purchase order, excluding the effects of early termination provisions. Actual payments could be less than amounts presented herein.
(3)Retirement and postretirement benefits represent estimated benefit payments for our U.S. and non-U.S. defined benefit plans and our postretirement medical plans, as more fully described below and in Note 14 to our consolidated financial statements included in Item 8 of this Annual Report.
As of December 31, 2020, the gross liability for uncertain tax positions was $54.8 million. We do not expect a material payment related to these obligations to be made within the next twelve months. We are unable to provide a reasonably reliable estimate of the timing of future payments relating to the uncertain tax positions.
The following table presents a summary of our commercial commitments at December 31, 2020:
Commitment Expiration By Period
Within 1 Year 1-3 Years 3-5 Years Beyond 5Years Total
(Amounts in millions)
We expect to satisfy these commitments through performance under our contracts.
PENSION AND POSTRETIREMENT BENEFITS OBLIGATIONS
Plan Descriptions
We and certain of our subsidiaries have defined benefit pension plans and defined contribution plans for full-time and part-time employees. Approximately 62% of total defined benefit pension plan assets and approximately 51% of defined benefit pension obligations are related to the U.S. qualified plan as of December 31, 2020. Unless specified otherwise, the
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references in this section are to all of our U.S. and non-U.S. plans. None of our common stock is directly held by these plans.
Our U.S. defined benefit plan assets consist of a balanced portfolio of equity and fixed income securities. Our non-U.S. defined benefit plan assets include a significant concentration of United Kingdom ("U.K.") fixed income securities, as discussed in Note 14 to our consolidated financial statements included in Item 8 of this Annual Report. We monitor investment allocations and manage plan assets to maintain an acceptable level of risk. At December 31, 2020, the estimated fair market value of U.S. and non-U.S. plan assets for our defined benefit pension plans increased to $765.0 million from $745.1 million at December 31, 2019. Assets were allocated as follows:
U.S. Plan
Cash and Cash Equivalents 1 % 1 %
Global Equity 30 % 28 %
Global Real Assets 13 % 12 %
Equity securities 43 % 40 %
Diversified Credit 14 % 12 %
Liability-Driven Investment 42 % 47 %
Fixed income 56 % 59 %
Non-U.S. Plans
Cash and Cash Equivalents 1 % 2 %
North American Companies 1 % 1 %
Global Equity 1 % 1 %
Equity securities 2 % 2 %
U.K. Government Gilt Index 39 % 43 %
Liability-Driven Investment 12 % 7 %
Fixed income 51 % 50 %